(NO LONGER RELEVANT)100% Small Cap Value Index for 36 Years?

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jeffersonkim
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(NO LONGER RELEVANT)100% Small Cap Value Index for 36 Years?

Post by jeffersonkim »

UPDATE:
I'm looking into Small Cap Value over 36 years rather than REIT. It looks as though there are plenty of posts which go into the prospective long term performance of Small Cap Value, so there's no point in continuing this thread. (http://www.bogleheads.org/forum/viewtopic.php?t=78509)




According to this report, from January 1978 - December 2012, the REIT index returned 13.1% /year vs. S&P 500's
11.5%.

http://www.reit.com/REIT101/REITAttribu ... mance.aspx

If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible, such as the VNQ ETF?

Yes, there may be extremely high volatility, and I'll of course change my overall mix between bonds, stocks, etc. Also, past performance doesn't guarantee future performance.

What kind of downfalls can be seen in trying to get that extra 1.6% ROI investing in REITs vs. S&P 500?


EDIT:
With my logic, it looks as though other classes may bring "better" returns according to:
http://www.bogleheads.org/wiki/Historic ... ed_Returns

And then here are some who disagree with the long term models:
http://seekingalpha.com/article/1480091 ... value-etfs
Last edited by jeffersonkim on Sun Jun 23, 2013 9:07 pm, edited 2 times in total.
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StormShadow
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Re: 100% MSCI REIT Index for 36 Years?

Post by StormShadow »

Well, outside of the volatility you just mentioned, I'd also emphasize the lack of diversification. There are only 119 companies under the Vanguard's REIT fund.

If you didn't go the US Total Stock Market Route or global weighted, I'd much rather choose the S&P500. If you have the stomach for high volatility and maximum returns, I'd actually next prefer a small cap index fund (following the Russell 2000 or a similar benchmark) over a REIT fund.
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jeffersonkim
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Re: 100% MSCI REIT Index for 36 Years?

Post by jeffersonkim »

StormShadow wrote:Well, outside of the volatility you just mentioned, I'd also emphasize the lack of diversification. There are only 119 companies under the Vanguard's REIT fund.

If you didn't go the US Total Stock Market Route or global weighted, I'd much rather choose the S&P500. If you have the stomach for high volatility and maximum returns, I'd actually next prefer a small cap index fund (following the Russell 2000 or a similar benchmark) over a REIT fund.
Yeah, according to the other listed "asset classes" and a three-factor world paper (http://www.thebamalliance.com/BAMIntell ... edroe.aspx) it looks as through Small Cap Value index may be better returns with higher risk (or Vanguard's VBR).
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SimpleGift
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Re: 100% MSCI REIT Index for 36 Years?

Post by SimpleGift »

jeffersonkim wrote:If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible, such as the VNQ ETF?
You're making the mistake of conflating past returns with expected future returns. No one know what the relative returns of various risk asset classes will be over the next 30 years. Very often the highest returning asset classes in one period are the lowest returning ones in the next period. This is why the recommended approach is to diversify your investments as widely as you can, across a wide selection of stocks — including domestic stocks, international stocks, small cap stocks, REITs, etc. You can accomplish this easily with just two funds: Total Stock Market Index (3,434 domestic stocks) and Total International Stock Index (6,525 international stocks).

This will give you a much better chance to accomplish your financial goals that betting everything on just 119 REIT stocks. The famous quote (by Sir John Templeton) is: "The only investors who shouldn't diversify are those who are right 100% of the time." Are you one of those investors?
Last edited by SimpleGift on Sun Jun 23, 2013 8:47 pm, edited 1 time in total.
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jeffersonkim
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Re: 100% MSCI REIT Index for 36 Years?

Post by jeffersonkim »

Simplegift wrote:
jeffersonkim wrote:If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible, such as the VNQ ETF?
You're making the mistake of conflating past returns with expected future returns. No one know what the relative returns of various risk asset classes will be over the next 30 years. This is why the recommended approach is to diversify your investments as widely as you can, across a wide selection of stocks — including domestic stocks, international stocks, small cap stocks, REITs, etc. You can accomplish this easily with just two funds: Total Stock Market Index (3,434 stocks) and Total International Stock Index (6,525 stocks).

This will give you a much better chance to accomplish your financial goals that betting everything on just 119 REIT stocks. The famous quote (by Sir John Templeton) is: "The only investors who shouldn't diversify are those who are right 100% of the time." Are you one of those?
For a 36 year period, don't you think there are some "classes" that will outperform others?

Isn't it generally understood that bonds will (with great likelyhood) be outperformed by stocks over a 20 year period?

If one could generally believe that stocks will outperform bonds over the long term, then couldn't one also take the next step and state that certain equity classes will outperform other equity classes?

So for example, US Small Value Stocks is frequently cited to outperform large cap stocks over the long term:
http://www.bogleheads.org/wiki/Historic ... ed_Returns


Of course, nothing is 100% guaranteed in the future. I guess, I'd be willing to take that level of "calculated" risk.
Grt2bOutdoors
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Re: 100% MSCI REIT Index for 36 Years?

Post by Grt2bOutdoors »

Markets can remain irrational longer than you can remain solvent. Past performance is not indicative of future performance - just ask the Dutch about tulips, how'd that work out after 400 years? I realize you are inquiring about a relatively short term period of 36 years.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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G-Money
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Re: 100% MSCI REIT Index for 36 Years?

Post by G-Money »

If you're investing in the rearview mirror, why not AAPL instead of VNQ?
Don't assume I know what I'm talking about.
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G-Money
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Re: 100% MSCI REIT Index for 36 Years?

Post by G-Money »

jeffersonkim wrote:
Simplegift wrote:
jeffersonkim wrote:If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible, such as the VNQ ETF?
You're making the mistake of conflating past returns with expected future returns. No one know what the relative returns of various risk asset classes will be over the next 30 years. This is why the recommended approach is to diversify your investments as widely as you can, across a wide selection of stocks — including domestic stocks, international stocks, small cap stocks, REITs, etc. You can accomplish this easily with just two funds: Total Stock Market Index (3,434 stocks) and Total International Stock Index (6,525 stocks).

This will give you a much better chance to accomplish your financial goals that betting everything on just 119 REIT stocks. The famous quote (by Sir John Templeton) is: "The only investors who shouldn't diversify are those who are right 100% of the time." Are you one of those?
For a 36 year period, don't you think there are some "classes" that will outperform others?

Isn't it generally understood that bonds will (with great likelyhood) be outperformed by stocks over a 20 year period?

If one could generally believe that stocks will outperform bonds over the long term, then couldn't one also take the next step and state that certain equity classes will outperform other equity classes?

So for example, US Small Value Stocks is frequently cited to outperform large cap stocks over the long term:
http://www.bogleheads.org/wiki/Historic ... ed_Returns


Of course, nothing is 100% guaranteed in the future. I guess, I'd be willing to take that level of "calculated" risk.
What about REITS makes you think that their past outperformance will repeat? Why not Tech, or utilities, or healthcare, or energy?
Don't assume I know what I'm talking about.
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jeffersonkim
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Re: 100% MSCI REIT Index for 36 Years?

Post by jeffersonkim »

Grt2bOutdoors wrote:Markets can remain irrational longer than you can remain solvent. Past performance is not indicative of future performance - just ask the Dutch about tulips, how'd that work out after 400 years? I realize you are inquiring about a relatively short term period of 36 years.
Are you stating your rationale for diversification is the Tulip bubble?

https://en.wikipedia.org/wiki/Tulip_mania

Would you state that in the next 36 years, you believe there to be a huge economic catastrophe that will be greater than the latest depression and the one in the late 1920s?

I don't really understand your point for bringing that up.
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jeffersonkim
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Re: 100% MSCI REIT Index for 36 Years?

Post by jeffersonkim »

G-Money wrote:
jeffersonkim wrote:
Simplegift wrote:
jeffersonkim wrote:If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible, such as the VNQ ETF?
You're making the mistake of conflating past returns with expected future returns. No one know what the relative returns of various risk asset classes will be over the next 30 years. This is why the recommended approach is to diversify your investments as widely as you can, across a wide selection of stocks — including domestic stocks, international stocks, small cap stocks, REITs, etc. You can accomplish this easily with just two funds: Total Stock Market Index (3,434 stocks) and Total International Stock Index (6,525 stocks).

This will give you a much better chance to accomplish your financial goals that betting everything on just 119 REIT stocks. The famous quote (by Sir John Templeton) is: "The only investors who shouldn't diversify are those who are right 100% of the time." Are you one of those?
For a 36 year period, don't you think there are some "classes" that will outperform others?

Isn't it generally understood that bonds will (with great likelyhood) be outperformed by stocks over a 20 year period?

If one could generally believe that stocks will outperform bonds over the long term, then couldn't one also take the next step and state that certain equity classes will outperform other equity classes?

So for example, US Small Value Stocks is frequently cited to outperform large cap stocks over the long term:
http://www.bogleheads.org/wiki/Historic ... ed_Returns


Of course, nothing is 100% guaranteed in the future. I guess, I'd be willing to take that level of "calculated" risk.
What about REITS makes you think that their past outperformance will repeat? Why not Tech, or utilities, or healthcare, or energy?
I'm looking more toward Small Cap Value over REITs at this time.
Topic Author
jeffersonkim
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Re: 100% MSCI REIT Index for 36 Years?

Post by jeffersonkim »

jeffersonkim wrote:
G-Money wrote:
jeffersonkim wrote:
Simplegift wrote:
jeffersonkim wrote:If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible, such as the VNQ ETF?
You're making the mistake of conflating past returns with expected future returns. No one know what the relative returns of various risk asset classes will be over the next 30 years. This is why the recommended approach is to diversify your investments as widely as you can, across a wide selection of stocks — including domestic stocks, international stocks, small cap stocks, REITs, etc. You can accomplish this easily with just two funds: Total Stock Market Index (3,434 stocks) and Total International Stock Index (6,525 stocks).

This will give you a much better chance to accomplish your financial goals that betting everything on just 119 REIT stocks. The famous quote (by Sir John Templeton) is: "The only investors who shouldn't diversify are those who are right 100% of the time." Are you one of those?
For a 36 year period, don't you think there are some "classes" that will outperform others?


Isn't it generally understood that bonds will (with great likelyhood) be outperformed by stocks over a 20 year period?

If one could generally believe that stocks will outperform bonds over the long term, then couldn't one also take the next step and state that certain equity classes will outperform other equity classes?

So for example, US Small Value Stocks is frequently cited to outperform large cap stocks over the long term:
http://www.bogleheads.org/wiki/Historic ... ed_Returns


Of course, nothing is 100% guaranteed in the future. I guess, I'd be willing to take that level of "calculated" risk.
What about REITS makes you think that their past outperformance will repeat? Why not Tech, or utilities, or healthcare, or energy?
I'm looking more toward Small Cap Value over REITs at this time.
http://ibd.morningstar.com/article/arti ... ,%20brf295
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bottomfisher
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Re: 100% Small Cap Value Index for 36 Years?

Post by bottomfisher »

Of course, nothing is 100% guaranteed in the future. I guess, I'd be willing to take that level of "calculated" risk.
I disagree that this is a "calculated" risk. You simply extrapolated past returns and presume they will repeat. See this thread for a true "calculation" of anticipated return: http://www.bogleheads.org/forum/viewtop ... st=1689476 .

Of course no one can reliably calculate future returns. But I think the very knowledgable OP's point is to proceed cautiously with REITs because they are arguably at high valuations and it is reasonable to expect lower future returns than in the past.

I consider an all in approach with REITs more gambling than investing. I think the lack of diversication among other sectors and/or investment vehicles will burn you. I'm not a small value tilter. But at least an all in approach into small value provides better diversification in your attempt to maximize returns despite risk.
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Frengo
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Re: (NO LONGER RELEVANT)100% Small Cap Value Index for 36 Ye

Post by Frengo »

jeffersonkim wrote: If I intend to keep the funds in my Roth IRA for over a 36 year period, then wouldn't it make sense for me to simply go for the highest return possible
Indeed it would, but nobody knows which subset of the stock market will generate the highest return in the next 36 years.
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G-Money
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Re: 100% Small Cap Value Index for 36 Years?

Post by G-Money »

Let me get this straight: At 8:58 pm Eastern, you were considering going 100% REITs for the next 36+ years, based, as near as I can tell, strictly on their past performance. Now, just 2 hours later, your plan (and this thread title) has changed to going 100% SCV.

Forgive me for doubting your ability to stay the course. I think significantly more reading and research is in order. I'd recommend starting with the wiki, then moving onto some of the books on the Boglehead reading list.

Good luck.
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MN Finance
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Re: 100% Small Cap Value Index for 36 Years?

Post by MN Finance »

I think your logic is fine, but the issue is one of behavior over time and thats not something you can control based on todays rational mind. If you are literally going with one asset class (as opposed to this just being an academic question) you have to be willing to put up with a decade of underperformance to eventually come out slightly ahead. I can tell you watching tech go up for ten years while sitting in svc was not something many people would be willing to do, regardless of what you might say today. If you can take all behavior out of it thats something else (ex: my son is 2 and I invested 10k in his IRA in EM value. He wont know its even there until I tell him 20 yrs from now).
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Kalo
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Re: 100% Small Cap Value Index for 36 Years?

Post by Kalo »

I just can't see putting all of one's eggs in one basket.

The way I look at it, my retirement needs are too important to gamble more than a small % on a specific, concentrated sector.

I used to be all over the map before I started reading the Bogleheads forums. Now I actually have more confidence in my portfolio and have good reasons for my asset allocation. Diversification helps me sleep at night.

William Bernstein's The Four Pillars of Investing uses centuries of historical data and reading it really opened my eyes.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.
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zaboomafoozarg
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Re: (NO LONGER RELEVANT)100% Small Cap Value Index for 36 Ye

Post by zaboomafoozarg »

If you want to tilt, I'd consider using total market funds for the majority of your stock portfolio (70%-90%) and tilting with the rest. But that's just me.
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