Asking the Wrong Questions

Is your house an investment?

Does this count as market timing?

Is Social Security a bond?

Questions like the above — questions about how to categorize something (“Does ____ count as ____?”) are frequently a distraction from what really matters. When somebody asks a question like that on the Bogleheads forum or elsewhere, or participates in such a discussion, they’re generally just signing up to be one of several strangers talking past each other on the internet.

If you own a home, that home is an asset on your household balance sheet, and its value will change from one year to the next. And that value will likely go up over an extended period of time. For some people, that’s sufficient reason to call it an investment. For other people, it isn’t. But it affects your household finances just the same regardless of what you call it.

Or consider Bill Bernstein’s “if you’ve won the game, stop playing” concept. Imagine that your portfolio has recently grown to the point where it can satisfy your retirement needs — and it wouldn’t satisfy those needs if it fell significantly. So you consider moving a large chunk of your portfolio into a TIPS ladder. Some people would call that market timing, because it’s based on the market having just gone up and/or interest rates being at a certain level. Some people would say it isn’t market timing. But really, who cares? All that matters is whether this proposed course of action a good idea.

On the topic of whether Social Security should be considered a bond, we again should focus instead on the actual course of action. In many cases, what is really being asked is whether the portfolio should be largely invested in stocks (because Social Security would be considered a very large “bond” holding). And that’s what we should focus on — does it make sense for this household’s portfolio to have a very stock-heavy allocation? Maybe it does. Or maybe it doesn’t. But what we call Social Security doesn’t change their actual finances in any way. And thus it should have no impact. If it does have an impact, something already went wrong at an earlier step in the planning (e.g., they already made an arbitrary decision that their portfolio should be X% in stocks and Y% in bonds).

What’s the financial decision you’re considering making? That is, what action are you considering taking? Is it a good idea? That’s what we want to focus on.