Source: P215, ETF for Dummies, 2nd Ed (2011) by Russell Wild:

Your residence, your portfolio If you bought your home for, say, $130,000 some 26 years ago, and that home is now worth $1.3 million, I say “Congratulations!” (Yeah, even though it may have been worth $1.8 million in 2005.) But don’t let that bounty affect your portfolio decisions very much. After all, you’ll always need a place to live. Sell the house today, and you’ll presumably need to buy another (made of a similarly overpriced bundle of tiles and plywood).

Of course, someday you may downsize, and at that time you will be able to allot part of the value of your home to your portfolio. For that reason, and that reason alone, you may want to consider that the value of domestic real estate and the value of commercial real estate, while two different animals, are related. If your home represents a big chunk of your net worth, and especially if you are approaching a stage in life when you may consider downsizing, you may want to invest less in REITs than would, say, a renter of similar means. Or you may forget about U.S. REITs altogether.

Would someone please explain and enlarge on the last paragraph?

Why would one "want to invest less in REITs than would, say, a renter of similar means [or] ... forget about U.S. REITs altogether"?

1 Answer 1


The answer is given in the question, but let me give you an example.

You wish to invest in indexed stocks and bonds, with a little bit in real-estate. So, 10% REIT, 40% bonds, 25% US Stocks, and 25% worldwide stocks. That's just an example, I'm not specifically recommending that allocation. You have $750,000 total in these investments.

But. Your house is too large. It's time to sell it and downsize. You plan to do so sometime in the next five years or so. You expect to sell your house for $750,000 and purchase a smaller replacement valued at roughly $500,000.

Now do you see the problem? You don't only have 10%, $75,000, in real-estate investments. You've actually got $325,000 in real-estate investments. Instead of accounting for 10% of your total portfolio, if you consider downsizing your house, you actually have 32.5% of your investment in real-estate. Sure, only 10% (well, actually, 7.5%) of your investment is in REIT, but as your quote points out, domestic and commercial real-estate is related, and you are perhaps over-invested in real-estate when you take this into account.

Now, maybe you are happy with almost a third of your portfolio in real-estate. The quote is just pointing out that this is something you should consider. When you are considering downsizing your house, you are considering treating a part of its value as part of your portfolio, rather than just treating your house as a place to live.

  • 1
    For a 10% REIT goal, for most of us our home will more than cover the Real Estate percent. In the example you cite, even the $500K home is a huge fraction of the total portfolio. Feb 17, 2014 at 15:46
  • I think that book wrongly conflates "assets" with "investments", whereas investments are only a subset of your assets.
    – RonJohn
    May 14, 2017 at 4:34

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