Finally, fix how you account for the mortgage itself. A mortgage is not merely a monthly bill. In portfolio terms it is a short position in a bond: you have borrowed fixed-rate money and owe a stream of fixed payments to a lender, exactly as a bond issuer does. Treating it as anything less quietly distorts your whole asset allocation.
Consider a household holding a $1,000,000 mortgage at rate and, at the same time, $1,000,000 in Treasury or municipal bonds yielding . On paper this looks like a balanced, conservative portfolio. It is nothing of the kind. The bond holding and the mortgage offset: the household is long $1,000,000 of fixed income and short $1,000,000 of fixed income, netting to roughly zero bond exposure — while paying the spread for the privilege. Whenever the mortgage rate exceeds the after-tax bond yield — which it usually does, because the lender has to make a margin and you cannot deduct interest indefinitely under the $750,000 cap and the 2/37 rule — this is a guaranteed loss dressed up to look prudent. What remains, economically, is a portfolio that is effectively all equities and real estate, with a fixed cash drain bolted on.
So treat the mortgage as negative fixed income and let it inform the rest of the allocation. If you carry a large mortgage, you have already taken your fixed-income “short,” and your liquid portfolio can reasonably skew toward equities and other productive, inflation-resistant assets rather than toward bonds yielding less than your mortgage rate. The combination to avoid is holding a substantial bond allocation and a substantial higher-rate mortgage at once — that is paying a guaranteed spread purely to feel diversified. When the mortgage rate is low and bond yields are comparable or higher, the calculus shifts; the discipline is to net the two deliberately, not to ignore one of them. See section “Housing’s Role in Optimal Portfolios” for how the house and its mortgage fit the overall stock/bond split.