Book: Sense of an Ending

The book is short (~160 pages) and I read it in one sitting. Short, elegant and an ambiguous ending. I got this as a book recommendation (on Facebook!). Only later did I see that it won the Booker Prize in 2011. The award is well-deserved.
This is the first e-book that I borrowed from the library and read on the Kindle (actually iPad app). Pretty seamless.

2-14-12: What I am reading..

 

Book: An Optimist’s Tour of the Future

What’s Next?

Author Mark Stevenson sets out to answer this question in a wide ranging survey of all the new stuff coming down the pipe in the near future. From nanotechnology, robots and genome sequencing to climate change and bio-charcoal, we get a delightful look at how the future could look like.

I especially liked the end where Mark tries to summarize what it all means. More than a compilation of exciting stories about new technology, this is an indicator of the acceleration of change that we will see in our lives over the next few years/decades. As Ray Kurzweil said in his famous book – “The Singularity is Near”.

 

Should your home equity affect your portfolio asset allocation?

The conventional advice in asset allocation is to allocate about 5-10% of your portfolio to Real Estate. A home is clearly Real Estate. So can an investment in your home be considered as your RE portion of your asset allocation?

Author Larry Swedroe covers this in his book, “The Only Guide You’ll Ever Need for the Right Financial Plan…

A primary residence is clearly real estate, but it is very undiversified real estate. First, it is undiversified by type. There are many types: office, warehouse, industrial, multi-family residential, hotel, and unimproved land. Owning a home provides exposure to just the residential component of the larger asset class of real estate. Even by excluding multi-family residences, it is only exposure to the single-family component. Second, a home is undiversified geographically. Home prices might be rising in one part of the country and falling in another. Third, home prices may be more related to an exposure to an industry than to real estate in general. For example, in the 1980s, home prices in Texas and in oil-producing regions in general collapsed when oil prices collapsed. One’s home provides some exposure to real estate but not diversified exposure.

A home is a very different financial asset. You cannot perform the normal portfolio maintenance tasks such as rebalancing and tax management. While clearly an asset with value that should appear on the balance sheet and be considered a possible source to fund future cash-flow needs (through a reverse mortgage or sale), it should be excluded from consideration when thinking about asset allocation.

But according to Swedroe, a mortgage on the home should be considered in the asset allocation as a negative fixed-income allocation (because you, as the owner, have borrowed money instead of lending money).

A mortgage (or any other form of debt) should be considered as negative exposure to fixed-income assets and treated as such in the asset-allocation picture. For example, if you are holding a $200,000 mortgage and have $200,000 of fixed income assets, your fixed-income allocation is zero, not $200,000.”

I understand the reasoning but it does seem like I am taking only one side of the equation into account here. To be fair, Swedroe does recommend considering all other non-tradeable financial assets like home equity and insurance when considering your risk profile.

For now, I am sticking to the default posture of ignoring both sides of the equation (Happily, home prices in our neighborhood are still above where we bought it). But a broader model that takes these other factors into account would be nice. An possible approach is described by Ashvin Chhabra in “Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors“. Maybe a post for another day …

Has Investor Risk really increased?

James Paulsen, Wells Cap:

Based on a commonly accepted definition of stock market risk (price volatility), for those investors with a longer horizon than a week, “risk” has not changed from what it has been since WWII. Is it appropriate, therefore, that most perceive stock market “risk” has risen significantly?

Daily volatility in the Dow Jones (and probably true for other benchmarks) has increased to levels not seen since the Great Depression, but weekly or monthly volatility is pretty much in the norm. So while traders need to watch this closely, long term investors can ignore it (or at least not reduce their exposure as a result).

What the heck are ola leaves?

http://www.thedailybeast.com/newsweek/2011/10/23/exclusive-raj-rajaratnam-reveals-why-he-didn-t-take-a-plea.html

and an older one from the newyorker: http://www.newyorker.com/reporting/2011/06/27/110627fa_fact_packer

via http://ftalphaville.ft.com/blog/2011/10/24/710121/chaat-ola-leaves-and-the-curious-case-of-raj-rajaratnam/