Mortgage and tail risks

First let me start with what this post is not about. I dont plan to cover whether to pay off a mortgage early or to keep it. There are lot of articles in the internet covering that aspect. I plan to cover how to manage tail risks of owning a home, given real estate prices can be sky high in the coastal areas of the US. How to manage the mortgage dance with a balanced portfolio that can be resilient when tail events do occur.

This post outlines some of the tail risks pertaining to home ownership

1. Losing job and having too low emergency funds(~2 months) to cover cash
2. High debt equity ration of the assets (huge mortgage and equity prices crash leading to inability to service mortgage payments). This is more risky in case of multiple mortgages and rental businesses
3. Losing job and losing immigration status - a reasonable emergency fund(~6 months) may also fall short
4. Mortgage may go underwater (2008 recession)
5. Natural calamity (earthquake, cyclone, infectious disease affecting cities - 2020)
6. Having a huge mortgage towards the end of a short term or long term debt cycle

How can you structure your portfolio to account for such risks

1. Have significant emergency funds in short and long term treasuries
1. Account for 1-2 years of mortgage payments on primary residence
2. Account for 6 months - 1 year of rental payments per unit in case of moratorium on rents
3. Account for personal and family expenses in case you are out of job and rental income for a while
4. Account for medical emergencies in case of health insurance loss
5. This is what a healthy balance sheet looks like. Google had 120bn in cash, Microsoft had 130 billion in cash, Facebook had 60 billion in cash going into the covid crisis. For all these companies it stands for ~10% of their market cap. 
2. Diversify your equity holdings 
1. Dont have stock concentration risk in the similar companies. For eg : google and facebook both make money from ads
2. Dont have concentration risk through index funds and individual stocks overlapping. For eg : Google Facebook Amazon Microsoft make up ~50% of QQQ and 20% of S&P500
3. Dont have correlation between index fund and home price. For eg : QQQ and bay area home prices are correlated
3. Buy insurance when it is cheap and VIX is low
1. Hold some alternate asset classes like Gold, bitcoin
4. All weather portfolios. If you had one at the beginning of the crisis, then your portfolio hopefully rose during the crisis. Also you are probably deriving healthy income from your portfolio. 
1. 40% Long term treasuries
2. 15% Intermediate term treasuries
3. 7.5% Gold
4. 7.5% Commodities
5. 30% Large Cap Equities
5. Diversify when it is cheap to build your portfolio for the future. Some areas to look into
1. Commercial real estate
2. Emerging markets
3. Oil
6. End of short term and long term debt cycles lead to deleveraging across the economy. If you have made money during the current credit cycle expansion, it may make sense to take some chips off the table

PS : the pessimist sounds smart, the optimist makes money