There are a couple of items above worth noting: 1) Investment Policy Statement (IPS) and 2) Allocation of REIT in a portfolio.
1) IPS - I use a spreadsheet that details our asset allocation. We set it and stay the course in all markets. As for a formal document, signed, etc. we don't have a need for it. If however this helps an investor stay the course and not market time in a bull or bear market, then by all means create one.
2) We have a 20% portfolio allocation (i.e. 30% of equity) to US REIT. We are on the fence about International REITs. Perhaps one day as we gain a better understanding and the costs decline. In any event, we have been REIT investors for a long, long time in all types of markets (including 2008/2009) and are very pleased with the returns and results in all markets. It has provided excellent diversification. We intend to stay the course and use the dividends to fund retirement.
Here are some points:
* David Swensen, Yale University CIO, and author of the awesome book "Unconventional Success" (i.e. get the book and read it), recommends 20% of a portfolio to REIT. Now there was a Yale Magazine article in March/April 2009 that noted Dr. Swensen revised the allocation to 15% of a portfolio, but 5% either way does not matter. I met Dr. Swensen last year at my University for an awesome lecture! The best part? He recommended the portfolio as was detailed in Unconventional Success, not the revised one. I have posted this to the forum. Dr. Swenson has noted that 5% - 10% of a portfolio is the minimum to allocate.
* Read Ralph Block "Investing in REITs" to gain an awesome understanding of this asset class and the many benefits. He recommends 15% - 20% of a portfolio to "move the needle", as 5% does not really do anything. You will learn that common fundamentals such as P/E is not the metric that is used but rather Funds From Operations (FFO).
* We have many clients, friends, and family members that have retired and lived from the cash flow (i.e. Dividends, Capital Gains, and Return of Capital - yes the taxability is quite easy, but that is another subject).
* REITs are structured different, taxed different, react to the overall market different (except in times of extreme stress - what does not go down? - but during the tech bubble collapse they were positive).
* REITs are only 3% give or take of the Total Stock Market fund. The reason many investors advise a greater allocation is the amount of Real Estate in the real economy, including private real estate, not just the stock markets.
* Check out http://www.reit.com
for excellent educational information (yes, it is a REIT website all things considered).
* Sam Zell, the father and "REIT King" has a ton of REIT investments including Equity Residential and Equity Lifestyle. The dividend income to Mr. Zell is being incredible to live from.
* We have used 20% of equity in he past (the 15% of a portfolio) and were satisfied with that allocation too. I really would not go any lower or I would eliminate the allocation.
* I always use Warren Buffett's "sleep test" - that is he often notes if you can sleep at night, and you are not up, or worrying, you have the allocation that is correct for you. If however, you are upset, up at night, you need to change things!
Post any additional questions you may have.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs