We wanted to receive some feedback and opinions related to REITS and our overall portfolio:
No need for tax, asset location, emergency funds, debt, etc. so no reason to post in the preferred format.
It appears that many of the largest fortunes in our country were built on Real Estate. I once read, that outside of oil (which only went on for a small time frame and only for a select few), real estate has been the biggest driver of wealth with the stock market.
Current Equity Allocation:
1) Total Stock Index - 50% of equity
2) Total International Index - 30% of equity
3) US REIT - 20% of equity
I am fine with a 30% allocation to International and do not plan to change. My question is related to the Total Stock Market and US REIT allocation. Either 50% TSM and 20% REIT or 40% TSM and 30% REIT. For the moment and arguements sake, I have no interest in a less than 20% of equity allocation to REITs. Without arguing, I am of the opinion anything less will have minimal to no impact and an investor should not bother at all. However, a 30% of equity allocation to REIT, is about 42% of US holdings.
With 20% of equity allcoated to REIT, that equates to about 15% of the overall portfolio. In the great book, "Bogle on Mutual Funds", Jack's "accumulation portfolio" recommendation allocates 15% of the portfolio to a specialty/sector fund. I am glad to have read Jack Bogle's thoughts on this. David Swensen's revised portfolio also included a 15% of the portfolio allocation to REIT.
That said, let's assume years down the road, a $1,000,000 portfolio with a 35% allcoation to stock and 65% allocation to bonds. That means $350,000 in equities at 20% of equity for REIT is $70,000. A $70,000 allocation to REIT on a $1 million portfolio is only 7%. Will this have much of an impact?
Along the lines of David Swensen's original recommendation (before being revised down from 20% overall REIT to 15% overall REIT at the portfolio level), if I went with a 20% overall portfolio allocation to REIT (which is approximately 30% of equities), the allocation on the $350,000 in equity would be $105,000. On a $1 million portfolio, that is 10%. That would have a lot more impact good or bad.
That said, if I directly invested in real estate, where there was no longer any depreciation benefit for tax purposes, and the mortgage was paid off, I would be paying tax on all profits at ordinary tax rates (i.e. same as REITs held in a taxable account). In addition, the allocation of total assets would probably be greater than 20% - 30% with direct real estate included.
I am considering adjusting the equity allocation to:
1) Total Stock Index - 40% of equity
2) Total International Index - 30% of equity
3) US REIT - 30% of equity
For the moment, I have no interest in International REIT/Real Estate for many of the reasons I have posted on the forum - high fees, restrictive, no endorsement by Jack Bogle, David Swensen, Rick Ferri, etc, not a 100% pure REIT fund, too much in Asia, tax/foreign tax credit debate, etc. For purposes of this post, let's exclude them for the moment.
I have looked at the backtested results over 40 years, and it appears REIT have beat the S&P since 1970 for all periods. I understand past performance is no guarantee, but that makes one take notice. This allocation is also based on David Swensen's Unconventional Success Portfolio (before the revised allocation decreasing REITs). I know this fund is volitile and dropped the same as TSM in 2008 (what didn't).
Further in reading many books on the REIT King himself Sam Zell, Wayne Huizenga of Fort Lauderdale/Waste Mgmt/Blockbuster/Auto Nation/ Swisher, even The Donald himself Trump, they all have made fortunes in REITs and Real Estate. I watched an interview with Donald Trump recently where he is telling Jim Cramer (yes I know) to include REITs in a portfolio. He stated REITs provide great access to property with awesome management teams.
My second question relates to Fixed Income allocation in the context of the above equity allocations.
We presently allocate our bonds as 100% Total Bond Market. We may be considering Inflation bonds again in the future (i.e. no interest in I Bonds, individual TIPS, CD's, etc.). If we do, we are considering a 30% allocation to the Intermediate Term Inflation Protected Bond Fund. The question is, with a higher % of equity allocated to REITs, would we be wise to allocate 30% of bonds to Inflation Bonds?
I understand the search for the perfect plan is the enemy of a good plan and that past results do not reflect future outcomes.
Any thoughts and feedback are appreciated.
Thank you everyone and have a great and safe holiday.
Last edited by abuss368
on Sun Nov 25, 2012 9:36 pm, edited 2 times in total.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"
Disclosure: Three Fund Portfolio + REITs