Chapter 7. Liabilities and Asset Allocation

Most investors make the mistake of focusing solely on the left-hand side of the balance sheet, their assets. They tend to ignore the right-hand side. This chapter briefly addresses the issues related to the liability side of the balance sheet. We begin with the home mortgage, as it is the largest debt obligation for most individuals.


Most people use a mortgage to finance the purchase of a home. Mortgages raise some important questions. How should the mortgage be treated in terms of determining your asset allocation? For investors with sufficient assets to have alternatives to using a large mortgage the questions are: Do I use my investment assets to keep the mortgage to a minimum or to pay down an existing mortgage, or do I borrow the maximum? As is often the case in investing, there is no right answer, just one right for each individual. Let's review the important issues that should be considered.

  • 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.

  • It is unlikely an investor can beat the risk-free rate of return on a mortgage if the fixed-income asset is held in a taxable account (unless interest rates have risen significantly since the debt was incurred). If fixed income assets can ...

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