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[Solid Masonry] Have I Taken This Diversification Thing Too Far Or Is It Time To Rebalance Our Portfolios?

John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who believes that all appraisers need to have a macro-economic perspective in order to be effective. This week, he frets over diversification and wonders if he can still walk a tightrope in Solid Masonry. …Jonathan Miller


Source: Census Bureau



I recently spoke with a few different friends in an effort to compare notes on our various investments strategies. In other words, how was I doing compared to them? This was not intended to be a game of one-upmanship, but simply a means of separating the hype from the truth.

Undoubtedly there are a myriad of publications trying to sell themselves by either giving advice or providing us with success stories of those who followed the good advice of others. But those stories tend to overwhelm me with too much information or make me feel as though I failed to do enough (or at least enough of the right things). So every once in a while I need to talk to my friends (fellow investors) for a reality check to be sure I’m not missing something. Especially since my stock portfolio has been “missing something” these past couple years; a decent rate of return.

Although we discussed the pros and cons of various vehicles (stocks, bonds, T-bills, managed funds, index funds, etc.), two of the more common themes that came up were diversification and asset allocation. So, I Googled those key words and found the Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing [1], an online publication posted by the Securities and Exchange Commission. While these investment strategies weren’t new to me, I ran through the article to refresh myself with the concepts.

Next I sat down with pencil and paper and tallied up my assets. And there it was staring me in the face. My diversification stinks! My asset allocation stinks! The fact is, I’m real estate rich and, well, not so rich in other areas. Which led me back to Google for a search on “net worth”, where I discovered Net Worth and Asset Ownership of Households; 1998 and 2000 [pdf] [2]. This report by Shawna Orzechowski and Peter Sepielli of the U.S. Census Bureau was written in 2003 and utilized data from a few years earlier still. None the less, their chart below demonstrates what my pencil and paper showed me, and that there are many others like me.

Here we clearly see that many of us have benefited from significant increases in real estate prices. And it doesn’t take a genius to figure out that “own home, rental property and other real estate” categories have no doubt outperformed many of our remaining assets during the past several years. Both homeowners and real estate investors have the choice of downsizing or cashing out some equity and reinvesting it elsewhere.

In addition, homeowners could choose to sell and rent for a while, with the idea of jumping back in after the dust has settled. The option of selling when a market is high and reallocating those funds is a real prospect, maybe even a prudent one. Yes, there might be taxes due, but many of us sell stocks or other equities when we deem their price is too high to be sustainable. In those cases the fear of loss outweighs the pain of taxes due. All these strategies have their risks, but they also offer real options and potential rewards. Especially if the real estate market goes sour, other investment vehicles outperform real estate, or better yet, both.

So I sit here and ask myself, have I taken this diversification thing too far? Or is it time to rebalance our portfolios?