As the saying goes, ‘home is where the heart is’, which means buying a house is usually an emotional decision.

Commonly, we buy our home with the intention of living there for some time, but we often don’t consider it to be part of our investment portfolio and therefore, its role in a balanced portfolio.

While many homeowners see their home as a residential property lifestyle asset, it is in fact, a long-term, tax-free property growth investment which will naturally increase in value over time.

When looking to build an investment portfolio, often the first thing that comes to mind is to purchase a residential rental property, and for some doctors, commercial premises for your practice.

Diversification is key

It’s important to ensure your investment portfolio is diversified. Owning many of the same type of assets, such as solely property investments, does not provide enough diversification to offer protection. Too many eggs are in one basket.

Diversification is having different asset classes, such as property, international and Australian shares, fixed interest bonds and cash. The amount you have in each asset class will depend on your goals and your ability to cope with short-term volatility.

Doctors’ salaries can increase exponentially. That increase makes borrowing to invest in property an attractive way to minimise taxation liabilities while building assets. Property has been a popular investment in Australia for a long time; it is tangible and most people understand how it works, to some degree. While it is fine to have property in your portfolio, it’s risky to have no other asset class. Property is expensive to buy, hold and sell, and probably the least liquid investment to own.

Let’s look at a balanced portfolio that doesn’t include your home (Figure 1), then add your home into the investment portfolio to see what this does to diversification (Figure 2).

You can see that when your home is included, your portfolio is a growth mix, not a balanced one, and has the associated risks. In particular, flexibility in the portfolio is significantly reduced due to the lack of liquidity of direct property holdings.

Your best defence

Proper diversification is important; it’s your best defence if any single asset class fails. We have seen the benefits of this, particularly when share markets fall.

Each asset class will provide its own benefits. A key consideration is how you feel about your portfolio’s volatility. Along with this is the length of time you need to hold onto your investments before you need to draw on them. Finally, consider what you need from your investments, whether it’s mainly income or growth. All of these factors will come together to determine what the right balance is for you.

Ignoring your home as an asset can potentially overweight your portfolio to the one asset class of property and its pros and cons. It may also leave you exposed to market risk and a lack of liquidity, so it’s worthwhile to obtain expert advice for your individual situation.

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