Is Your Home a Risky Investment?

When building portfolios, planners often focus entirely on stocks and bonds. But for many investors their home is their most valuable asset

David Blanchett, CFA 12 December, 2016 | 11:45AM

Your home is most probably your most valuable asset – outstripping the value of your ISA savings and most people’s pension portfolios. But the risks of investing in real estate are generally poorly understood.

There are significant homeownership risks driven largely by the illiquid nature of owning a single home. The risk of homeownership in the US is approximately double that of house price index investing such as the S&P Case-Shiller Home Price Indices, with an annual standard deviation of 12%, which is approximately equivalent to the historical volatility of a portfolio invested in 60% stocks and 40% government bonds.

While the return on house price indexes has exceeded inflation historically, the actual real return realised by homeowners, after considering the various costs associated owning and selling a home, has likely been negative in real terms.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

David Blanchett, CFA  is Director of Retirement Research with Morningstar Investment Management.

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