All The Money On One Currency, House?

[GeorgeF]

Reading the posts about investing all your money in one stock raised a question in my mind. Diversification in 'paper' assets like stocks/bonds is generally accepted, and even required by some laws governing pensions and such. Conservative investors are not encouraged to diversify away from their national currency or their local real estate market.

1) I have never heard anyone (TV pundits) encourage America's 'retires' to put some of their savings in a currency other than US$. (although inflation protected bonds are perhaps a similar thought)

2) Why is investing 100% of your wealth (down payement) and a minimum of 25% of your future income (mortgage payments) in a single piece of real estate a good idea?

[SossMan]

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2) Why is investing 100% of your wealth (down payement) and a minimum of 25% of your future income (mortgage payments) in a single piece of real estate a good idea?


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Because, unlike paper assets like stocks and bonds, a house has a tangable value to you. It serves the purpose of protecting your stuff, and keeping you dry.
As far as diversifying currency...it doesn't really make sense. The dollar is on a floating exchange rate w/ most other major currencies. Stocks are not on a floating exchange rate w/ the dollar.

[Ray Zee]

george, after 20 years you own a house free and clear. that is also worth a few times more than you paid for it. had a place to live, and will get tremendous tax breaks when you sell or trade it off.
you wont get that with a similar investment in stocks.

[GeorgeF]

"The dollar is on a floating exchange rate w/ most other major currencies."

The prices of all things in a free market 'float'. On possible argument is that all paper currencies are highly correlated so it does not matter which one you invest in. It is also possible that given inflation all paper currency investments are bad.

The question in my mind is, if you are saving for the down payment for a home that you expect to by in 2-5 years you cannot really invest in stocks as you might hit a bear market in stocks just when you need to cash out. You are basically stuck with short term bonds and maybe TIPS. I wonder if in that case keeping some of your money in foreign currencies wouldn't be a good idea.

As far as owning a home goes I think it is a good idea but I would point out that the future might be very different from the past. How will the following affect real estate and living patterns:

1) an aging population
2) a transportation revolution
3) perpetually low interest rates
4) the war in Iraq
5) increasing government (fed,state,local) pension obligations
6) private pension obligations
7) immigration laws
8) solvency of the airline industry
9) changes in agricultural subsidies
10) increases in commodity/energy prices
11) fuel cells

I don't want to cause 'analysis paralysis' but it seems people are assuming that real estate will be a good investment because it was in the past and that the same real estate markets that where hot in the past will be hot in the future.

For example what if the WTO causes the US to eliminate farm subsidies. Farm states like the Dakotas will have to develope other means of supporting themselves. Which means they will have to develope new industries and attract new people. That will move people from the coasts to the central states.

[laserboy]

It is your own responsibility to educate yourself regarding financial markets and investing. To anyone with an ounce of logic, it seems rather obvious that the dollar will continue to freefall. Only massive intervention from the Chinese and Japanese governments have prevented it from completely collapsing already. Holding a portfolio of 100% dollar denominated assets would be sheer lunacy to me. Of course you will not hear this on CNBC.

I have put a lot of thought into protecting my assets against the impending collapse of the dollar. Like you mentioned, TIPS and foreign currencies are a couple of ways to diversify. I am a stock guy, so I tend to favor businesses that will prosper in a falling dollar environment. There are a select number of commodities, consumer staples, and US exporters that should fare well. Precious metals and leveraged miners also have historically been a hedge against inflation. I am of the belief that a defensive style of value investing and protecting yourself against loss will generate superior returns in what I view as a secular bear market.

My thoughts regarding real estate: only a complete fool would invest in real estate right now. The people stretching themselves to buy into this market will go bankrupt or be underwater for years. Think Texas in the 1970's.

[laserboy]

A home, like any other asset, has an appropriate value associated with it. There is always a point at which it becomes more profitible to rent rather than own, placing your savings in more profitable investment vehicles. It is no more logical to pay $500,000 for a two bedroom condo than it was to buy Yahoo at $300 several years ago.

The corporate profits of most American companies are tied to the value of the dollar. For the majority of American companies and their stockholders, a continued decline of the dollar would be a bad thing.

[GeorgeF]

"Think Texas in the 1970's."

You might like the official S&L Crisis page:

http://www.fdic.gov/bank/historical/s&l/

[Just The Facts]

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2) Why is investing 100% of your wealth (down payement) and a minimum of 25% of your future income (mortgage payments) in a single piece of real estate a good idea?

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It is not a good idea. Housing values will plummet in the fall.

[Senor Choppy]

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george, after 20 years you own a house free and clear. that is also worth a few times more than you paid for it. had a place to live, and will get tremendous tax breaks when you sell or trade it off.
you wont get that with a similar investment in stocks.

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Owning a home isn't necessarily a good investment. Even with tax breaks, your property taxes, insurance, and maintenance costs add up.

The main reasons for owning vs. renting should be based on the fact that you want something of your own, hate having people that can hear you through walls, etc. People overestimate the financial benefits and make false assumptions (like home prices can go up indefinitely!)