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My question is this: do you consider REIT funds as part of your equity allocation? Do you consider Preferred Stock funds as "other?" Ironically I could never post this question to the Boglehead board because they only believe in the three fund portfolio and they believe dividends are dirty. Thanks in advance for your opinions.
I initially had VGSIX has part of my allocation, used growth of fund to invest in new funds such as VINEX - International. I moved the rest into VGSLX - Indez fund.
Definitely. I use Vanguard Global ex-US REIT, ETF, VNQI to expand oversea exposure - higher volatility without USD hedging than domestic REIT index. Also I use Fidelity Real Estate Income for domestic REIT (50/50 REIT equity/debt) - respectable return with 4.2% dividend.
I have pondered the same question when reading about what I refer to as alternative portfolios such as 'Gone Fishin' and the teachings of Paul Merriman. But, for me I can't get the logic to work. My lizard brain won't allow me to buy such a thing. This stems from the same argument I have against indexing. Let's first consider buying a 'Reit' index: there will undoubtedly be periods where they're out-of-favor. Just like any other asset, I suppose, but in this case you're doing it only because you believe you should have 'Reits' as an asset class. Now active may be a little more selective, but the same problem exists, are you holding it because it is or will be attractive, or just because? What happens if there's a protracted run of under-performance, relative to whatever you'd like to compare it against.
@BrianW. For me the reasons to hold a REIT are two. #1, I am soon to be a deaccumulator and I am quilty of chasing yield. #2 which addresses your post, is to diversify. The whole idea is that any of the components of my portfolio may be out of favor at any given time. More to the point,,,, to be diversified means I will always be mad at something in my portfolio. Aprapo of nothing,,,,, my biggest loser of 2018 was my big gainer of today.
But really all I was asking is do folks consider REITs part of their equity sleeve or it's own class?
Generally, I consider REITs as part of my equity allocation except for FRIFX, which performs more like a high yield bond or conservative allocation fund. I had FRESX in my portfolio for about 20 years and it was an excellent diversifier. As I got closer to retirement, I shifted about half the money into FRIFX. Now that I’m retired, I’ve shifted the entire real estate allocation into FRIFX due to its lower volatility, higher yield and better risk adjusted returns. REITs are not perfectly un-correlated with stocks but different enough to make a difference. Eg, FRESX had excellent returns during the 2000-03 bear market, the best of my portfolio. However, in 2008, it performed worse, but rebounded remarkably in 2009.
Much like Tarwheel I use FRINX (a different share class of FRIFX) as my real estate position. However, M*'s Xray bubbles FRIFX as stocks 32%, bonds 38%, other 23% and cash at 7% while it bubbles FRESX as stocks 99% and cash 1%. So, I guess what makes up the real estate fund you choose to use determines how one should break down its asset allocation. The first being more of an asset allocation fund (hybrid) and the other being an equity fund.
Most robo-advisers such as that used for Schwab Intelligent Portfolios have a REIT component, perhaps utilizing the Merriman line of thinking. For me, individual REIT holdings are a key component of the portfolio sleeve whose objective is to simply generate dividends.
The answer I believe is the truth that no one likes: It depends. The higher the average REIT’s yield is the more bond like they behave. The lower the yield, the more stock like. They’re called hybrid securities for a reason. When analysts expect most of REITs’ returns to come from price appreciation as opposed to yield , I see no reason to treat them as any different from most other stocks. The lower that yield goes, the more volatile and stock like I expect them to be. The opposite is also true. When REIT yields are high, which they haven’t been in a while, they become more bond like.
That said, there are different ways of looking at yield. One could look at yield relative to REITs’ own history—not high now—or REITs’ yield relative to bonds—pretty good versus Treasuries now. The problem is bond yields are rising with rates so the expectation is for the spread to narrow and markets move on expectations. Click here: https://reit.com/news/blog/market-commentary/using-reit-yield-spreads-make-tactical-investment-decisions
I once held a mix of CGMRX, VNQI, traded FRESX for VNQ (which underperforms it slightly), but a few years ago traded all for FRIFX, which is steadier. None of them notably decorrelates with, you know, VTI.
I have gone round and round though the years about the issue of how granular a portfolio should be. I think a REIT allocation is probably good, however I personally have decided to use the S&P 500 and stop further in depth allocations such as much discussed finer granular reits, mlp's, utilities etc. S&P500 contains all of the aforementioned within the index so I will stop there. The SP500 holds 3% reits and utilities so good enough for me. The argument can be made for more granularity outperforming the S&P500, but i will live with the simple solution. I like the fact mutual funds can easily reinvest dividends/cap gains if needed while some ETF's cannot (easily). I also like the fact that by the nature of the SP500 index it gradually picks the winners for me and discards the losers. just my 2c.
... do you consider REIT funds as part of your equity allocation?
Good question. I can’t recall its being batted around much before. Agree with others who say that it depends a lot on the particular REIT fund and perhaps more importantly the individual investor - particularly how he/she has structured their portfolio. Conceivably they could fit real estate within their growth, income - or even alternative investments category.
I haven’t held them often. They’re highly cyclical - scary in certain markets. Didn’t seem worth the added risk. However, I bought into one three or four years ago during a very depressed period. Did great for a year or so, but has stagnated since.
I include the real estate fund within the “real assets” portion of my portfolio as one of four holdings. The others consist of a gold fund, an infrastructure fund, and T. Rowe’s Real Asset fund (PRAFX). While the group as a whole has done poorly for the past year or so, the four funds do tend to move in different directions, dampening volatility.
BTW - Price overweights real estate substantially within its Real Asset fund. One might conclude from that that that they considers it to be a part of that broader category.
REIT's are a valid asset class and can certainly be used in a portfolio. Of course you can post this on the Boglehead board, as there are many Bogleheads that use REITS and there are a large number of Bogleheads that do not use the 3 fund portfolio. You may want to visit 150 portfolio sight, there you will see 150 different modeled portfolios, many of which use REIT's. David Swensen who manages Yale endowment recommends 20% in REITs. See: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
... I personally have decided to use the S&P 500 and stop further in depth allocations such as much discussed finer granular reits, mlp's, utilities etc. S&P500 contains all of the aforementioned within the index. ... The argument can be made for more granularity outperforming the S&P500, but i will live with the simple solution. I like the fact mutual funds can easily reinvest dividends/cap gains if needed while some ETF's cannot (easily). I also like the fact that by the nature of the SP500 index it gradually picks the winners for me and discards the losers. just my 2c.
Hi shipwreckedandalone,
Thanks for commenting. (Worth a lot more than 2c). All valid points. It’s not clear to me whether this represents a portion of your total invested assets or all of them. I suspect it’s the former. That said, I don’t think the argument for real estate or any other granular asset class rests only on maximizing return. There may be other considerations like diversifying assets (and hopefully mitigating risk), increasing income stream, hedging against the unexpected (rampant inflation, depression, war, tax law changes, etc.)
If I were age 25-40 and gainfully employed I’d be inclined to put 100% into growth (even possibly the S&P 500) and let her ride come Hell or high-water. A single fund (2 or 3 at most) would work fine. Even at age 40-50 that might make sense - but would require a stronger risk appetite. At 70 or older (with perhaps a 20-year life expectancy I believe an all-growth portfolio foolhearty, unless one is trying to build assets for posterity (estate planning). In that case, long as your own funding is assured for your lifetime, a 100% growth portfolio might still make sense.
To glean an appreciation of how much a 100% S&P 500 investment can fall in a relatively short time we need go back hardly more than a single decade (from Wikepedia): “The US bear market of 2007–2009 was a 17-month bear market that lasted from October 9th 2007 to March 9th 2009, during the financial crisis of 2007-2009. The S&P 500 lost approximately 50% of its value.”
Now - to sit still and endure the pain for 17 consecutive months while watching your total investment egg fall by 50% takes a great deal of intestinal fortitude. And, remember that on March 8, 2009 after 17 months of free-fall, there was no guarantee the market would reverse direction. History has taught that these downturns can persist for much longer. If an index can tumble 50% in 17 months ... it can just as easily fall 60 or 70% over a longer time. No law says it has to stop at 50%. (It’s likely real estate fared even worse during that period.)
In a nutshell, it depends a great deal on your life situation and ability to endure punishment. I think all of us could do a better job relating our age and years to / into retirement when discussing our allocations. One size does not fit all. Such understanding might benefit the younger newbies - if any.
PS: Just my humble mumble. I am not a qualified advisor. Other points of view welcomed.
The size of an investors portfolio vs budget is the most important discussion with a financial planner IMHO. This will drive asset allocation and risk tolerance. The age of the investor is the most critical component of that discussion as you noted. 100 % S&P 500 is a very aggressive portfolio. I believe in a balanced portfolio with income producing instruments. My personal AA preference is the "pay your bills first" method which requires income producers. All new investors should consult a financial professional.
>> I believe in a balanced portfolio with income producing instruments. My personal AA preference is the "pay your bills first" method which requires income producers. All new investors should consult a financial professional.
Many of whom may well suggest, in my experience, not looking at income production first, or even chiefly, at least not in the sense of living off of / paying bills from income stream.
Without looking at the details of the individual portfolio, age, health, cost basis, sources of income, tax conditions, risk tolerance and personal goals of the investor..... that might be a broad statement not applying to 100% of portfolios.
Comments
But really all I was asking is do folks consider REITs part of their equity sleeve or it's own class?
As I have posted before, I don't know what to think or do about true diversification in retirement.
DSEEX, which is its own kind of semi-wack, plus wack Pimco bond things, plus FRIFX, and that is it, if you ignore sundry hot-tip losers
That said, there are different ways of looking at yield. One could look at yield relative to REITs’ own history—not high now—or REITs’ yield relative to bonds—pretty good versus Treasuries now. The problem is bond yields are rising with rates so the expectation is for the spread to narrow and markets move on expectations. Click here: https://reit.com/news/blog/market-commentary/using-reit-yield-spreads-make-tactical-investment-decisions
I once held a mix of CGMRX, VNQI, traded FRESX for VNQ (which underperforms it slightly), but a few years ago traded all for FRIFX, which is steadier.
None of them notably decorrelates with, you know, VTI.
Speaking of that slow process, you sound like one who might enjoy having part of your SP500 holding be the CAPE etn.
I haven’t held them often. They’re highly cyclical - scary in certain markets. Didn’t seem worth the added risk. However, I bought into one three or four years ago during a very depressed period. Did great for a year or so, but has stagnated since.
I include the real estate fund within the “real assets” portion of my portfolio as one of four holdings. The others consist of a gold fund, an infrastructure fund, and T. Rowe’s Real Asset fund (PRAFX). While the group as a whole has done poorly for the past year or so, the four funds do tend to move in different directions, dampening volatility.
BTW - Price overweights real estate substantially within its Real Asset fund. One might conclude from that that that they considers it to be a part of that broader category.
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Thanks for commenting. (Worth a lot more than 2c). All valid points. It’s not clear to me whether this represents a portion of your total invested assets or all of them. I suspect it’s the former. That said, I don’t think the argument for real estate or any other granular asset class rests only on maximizing return. There may be other considerations like diversifying assets (and hopefully mitigating risk), increasing income stream, hedging against the unexpected (rampant inflation, depression, war, tax law changes, etc.)
If I were age 25-40 and gainfully employed I’d be inclined to put 100% into growth (even possibly the S&P 500) and let her ride come Hell or high-water. A single fund (2 or 3 at most) would work fine. Even at age 40-50 that might make sense - but would require a stronger risk appetite. At 70 or older (with perhaps a 20-year life expectancy I believe an all-growth portfolio foolhearty, unless one is trying to build assets for posterity (estate planning). In that case, long as your own funding is assured for your lifetime, a 100% growth portfolio might still make sense.
To glean an appreciation of how much a 100% S&P 500 investment can fall in a relatively short time we need go back hardly more than a single decade (from Wikepedia): “The US bear market of 2007–2009 was a 17-month bear market that lasted from October 9th 2007 to March 9th 2009, during the financial crisis of 2007-2009. The S&P 500 lost approximately 50% of its value.”
Now - to sit still and endure the pain for 17 consecutive months while watching your total investment egg fall by 50% takes a great deal of intestinal fortitude. And, remember that on March 8, 2009 after 17 months of free-fall, there was no guarantee the market would reverse direction. History has taught that these downturns can persist for much longer. If an index can tumble 50% in 17 months ... it can just as easily fall 60 or 70% over a longer time. No law says it has to stop at 50%. (It’s likely real estate fared even worse during that period.)
In a nutshell, it depends a great deal on your life situation and ability to endure punishment. I think all of us could do a better job relating our age and years to / into retirement when discussing our allocations. One size does not fit all. Such understanding might benefit the younger newbies - if any.
PS: Just my humble mumble. I am not a qualified advisor. Other points of view welcomed.
Many of whom may well suggest, in my experience, not looking at income production first, or even chiefly, at least not in the sense of living off of / paying bills from income stream.
Without looking at the details of the individual portfolio, age, health, cost basis, sources of income, tax conditions, risk tolerance and personal goals of the investor..... that might be a broad statement not applying to 100% of portfolios.