NEW YORK (CNN/Money) - Given this volatile market and the economy's sensitivity to world events, my wife and I are wondering if we should pay off our home mortgage with our current mutual fund investments or continue to invest in funds? We are both 38 years old and we have one child.

-- Stone, Cleveland, Ohio

What you're really asking me is whether you should bet it all on the house. Because by selling off your funds and using the proceeds to pay your mortgage, that's essentially what you would be doing; you would be aligning the financial future of your family to a large degree on the performance of one asset -- your home.

Now, considering the way that home prices thrived during the last recession while stock prices fell and then stagnated, pinning your financial hopes on your home might seem not only a prudent decision, but a brilliant one. But in reality it's more risky than you think.

For one thing, you would be violating one of the cardinal rules of savvy investing -- diversification. In fact, you would be flouting this all-important principle many times over.

Not only would you be putting virtually all your money in one asset class (i.e., real estate), you would be concentrating all your money on one type of real estate (residential) in one area (your neighborhood) in one structure (your home). That would be the equivalent of not just putting all your money in stocks or in the stocks of a particular industry, but investing it in the shares of just one company.

If something happens to undermine the economic vitality of your city or your particular neighborhood, the rate of appreciation in your home's price could drop precipitously or, for that matter, home values in your area could even fall.

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Granted, real estate values overall have a wonderful record of steadily rising. But there's plenty of evidence of stagnant or falling prices in particular neighborhoods in many cities around the country.

Besides, as good an asset as residential real estate has been in the U.S. the past 50 or so years, the fact is that when it comes to annualized rates of return, stocks have been even better. Home prices over the long term tend to rise by about one percentage point a year over inflation, although in some areas the return can be more like three percentage points or more. Stocks, however, have beaten inflation by more like seven percentage points a year over the long-term.

I don't say all this too scare you away from home ownership. Far from it. I believe owning a home, apart from its social and emotional value, is usually a terrific investment as well.

And it's got some wonderful tax advantages, what with home mortgage interest and real estate taxes being deductible and $500,000 of home-sale profits exempt from income tax for married couples and $250,000 escaping the U.S. Treasury's grasp for singles.

It's just that I don't think it's wise to invest the bulk of your money in a home, especially if you have the financial wherewithal to continue to accumulate other investments.

So my advice is continue to build a diversified portfolio of funds in addition to paying the mortgage on your home. If after a few years you feel you've got enough salted away in financial assets so that you're set for retirement and you can fund a good portion of your child's future education, then you can concentrate on paying off your mortgage at that point.

But for now, I'd say you should be looking to diversify your net worth among many assets, not concentrate it in one.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Mondays.