REITS

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REITS

Postby diyinvestor » Fri Jul 12, 2013 9:13 am

I want to add Vanguard's REIT index to my portfolio for a long term hold for diversification. Is now a good time to step in?
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Re: REITS

Postby Call_Me_Op » Fri Jul 12, 2013 9:35 am

Friend,

Quite honestly, that question makes no sense - since none of us has a crystal ball. I would say this:

1.) Make sure that your allocation to REITs, if any, plays well with your other assets and provides an acceptable trade-off between expected return and risk for the overall portfolio. If you do not already have one, you should have an IPS that discusses your rationale for including REITs and the nominal allocation you plan to hold, as well as guidelines for rebalancing.

2.) REITs are best held in tax-free or tax-deferred accounts because their dividends are subject to full taxation at your marginal rates.

3.) I hope you are aware that REITs are basically stocks and tend to be very volatile.
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Re: REITS

Postby Investing is boring » Fri Jul 12, 2013 9:42 am

Call_Me_Op wrote:Friend,

Quite honestly, that question makes no sense - since none of us has a crystal ball. I would say this:

1.) Make sure that your allocation to REITs, if any, plays well with your other assets and provides an acceptable trade-off between expected return and risk for the overall portfolio. If you do not already have one, you should have an IPS that discusses your rationale for including REITs and the nominal allocation you plan to hold, as well as guidelines for rebalancing.

2.) REITs are best held in tax-free or tax-deferred accounts because their dividends are subject to full taxation at your marginal rates.

3.) I hope you are aware that REITs are basically stocks and tend to be very volatile.


+1
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Re: REITS

Postby siamond » Fri Jul 12, 2013 9:49 am

diyinvestor wrote:I want to add Vanguard's REIT index to my portfolio for a long term hold for diversification. Is now a good time to step in?


It's probably a good idea to do it, notably if you follow the principles Call_Me_Op articulated very well. Don't fret about market timing, it's impossible to predict.
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Re: REITS

Postby ResearchMed » Fri Jul 12, 2013 10:45 am

Agree with all above.

IF - this is an "if" - you have decided that REITS do fit within your investment planning, and if you are considering a relatively large amount or percentage ("relatively" being the operative word - it doesn't need to be a big percentage of your total portfolio), you might feel more comfortable stretching the purchase over several weeks or months.

This is mostly for your emotional comfort, especially if this is the first time you are investing in REITS. They are incredibly volatile, and with larger swings that many other categories. How would you feel if you invested the full amount at one time, and it goes down 5% (or more) that very day? Probably won't feel good if you aren't also used to the upward swings, which could take a while to occur (and are never guaranteed).

So perhaps 1/3 or 1/4 over 3 or 4 weeks or months. Choose a day/date in advance, or wait until just after a drop (which might not occur in your time frame, so think this strategy through). The easiest might be to choose a few dates in advance, and "just do it".

IF this investment is for the very long term - and there's probably NO good reason to invest in REITS for any short term goals, unless you have a very special crystal ball [in which case, please call me at 555.555.5555] - then even the wild swings in the short term will *probably* work out okay.

But the "down" trend COULD go on for years, so if you decide to do this, also decide NOT to bail out after a major/extended downturn.
Otherwise, that's classic "buying high/selling low" - and others will be waiting to buy on those major downturns, and thus wait it out.

RM
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Re: REITS

Postby Quickfoot » Fri Jul 12, 2013 10:50 am

I hope you are aware that REITs are basically stocks and tend to be very volatile.


Research (including Vanguards) shows that in the short term they behave somewhat like stocks but long term they behave more like the real estate market so they are not basically stocks, they are a separate type of asset class just like high yield bonds. Their correlation is variable, sometimes more strongly correlated with bonds, sometimes more with equities. I hold 20% REITS because they often behave differently than equities, same reason I hold bonds, and also because fundamentally they are tied to the real estate market. Research I've seen shows that up to 15 to 20% REITS in a portfolio has resulted in less volatility and higher performance than an all equity / fixed income portfolio. Holding less than 10% of a specific asset class isn't going to strongly affect a portfolio, so holding something like 5% is pointless.

Before investing in anything you'll need to determine your goals, risk tolerance and do your own research. I personally will hold a minimum of 15% REITs even in distribution phase of retirement.
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Re: REITS

Postby fulltilt » Fri Jul 12, 2013 10:53 am

This thread might be interesting to you.

viewtopic.php?f=10&t=115965&p=1688269&hilit=reit#p1688269
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Re: REITS

Postby SGM » Fri Jul 12, 2013 11:17 am

I agree with above about timing. I only hold REITs in IRAs because the dividends are not qualified and are taxed at a higher rate. I have bought a little each year and plan on holding VNQ for a long time. There are REITs in the total stock market fund, last time I looked, but I want a little more exposure.
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Re: REITS

Postby Call_Me_Op » Fri Jul 12, 2013 12:43 pm

Quickfoot wrote:
I hope you are aware that REITs are basically stocks and tend to be very volatile.


Research (including Vanguards) shows that in the short term they behave somewhat like stocks but long term they behave more like the real estate market so they are not basically stocks, they are a separate type of asset class just like high yield bonds.


A REIT is a company that owns, and in most cases operates real estate. Since when you buy a REIT you share ownership of a company, it is a stock. It happens to be a stocks that is primarily involved with real estate - but nevertheless it is a stock and shares a similar risk profile.
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Re: REITS

Postby Quickfoot » Fri Jul 12, 2013 1:25 pm

It has a risk profile but to say it has the same risk profile as normal equities is inaccurate. It can be less volatile or more volatile and it's correlation to both fixed income and normal equities fluctuates. The factors that impact REITs profitability are different than traditional companies and their requirement to distribute income as dividends also changes their behavior.

REITs should not be considered or used in place of bonds but they also should not be considered equities, their allocation should be as separate asset class than either equities or fixed income.
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Re: REITS

Postby Drew31 » Fri Jul 12, 2013 1:45 pm

Quickfoot wrote:
I hope you are aware that REITs are basically stocks and tend to be very volatile.


Research (including Vanguards) shows that in the short term they behave somewhat like stocks but long term they behave more like the real estate market so they are not basically stocks, they are a separate type of asset class just like high yield bonds. Their correlation is variable, sometimes more strongly correlated with bonds, sometimes more with equities. I hold 20% REITS because they often behave differently than equities, same reason I hold bonds, and also because fundamentally they are tied to the real estate market. Research I've seen shows that up to 15 to 20% REITS in a portfolio has resulted in less volatility and higher performance than an all equity / fixed income portfolio. Holding less than 10% of a specific asset class isn't going to strongly affect a portfolio, so holding something like 5% is pointless.

Before investing in anything you'll need to determine your goals, risk tolerance and do your own research. I personally will hold a minimum of 15% REITs even in distribution phase of retirement.


When people are talking about X% in REITs, are they talking just the REIT index, or a total % of REITs they own through other funds such as Small Cap Value, etc. determined via Morningstar X-ray?


Find myself confused sometimes with these discussions.
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Re: REITS

Postby telemark » Fri Jul 12, 2013 3:34 pm

If the goal is long term diversification then now is always a good time to start.
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Re: REITS

Postby mrsub » Fri Jul 12, 2013 3:40 pm

REITs follow very closely to the change in interest rates. If you want to know whether now is a good time I would be hesitant and wait to see what happens with the 10y treasuries (2.6% as I write this). As they continue to increase in interest rates, the REITs will suffer. The trend for rates may continue up, so leg in if you go with it.
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Re: REITS

Postby Kevin M » Fri Jul 12, 2013 3:48 pm

I built up my position in the Vanguard REIT fund slowly over a few years, as I did with some other funds. Not saying this is correct, but it allowed me to become comfortable with the volatility, and helped me build the emotional strength to buy more when the price went down a lot.

REITs currently are between 13% and 15% of my equity allocation.

For the last couple of years I have just been rebalancing in and out of the fund as it hits my rebalancing bands. Since REITs can be quite volatile, I have rebalanced out and then back in (or vice versa) within just a few months on occasion, including recently. I have grown to appreciate the volatility.

Be prepared for single-day moves of up to 10%.

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Re: REITS

Postby M_to_the_G » Sat Jul 13, 2013 1:04 am

Hmm.... that is a compelling argument, but bumping REIT's up to 10% or more would mean reducing something else. If I'm 60% U.S. Stock Market, 15% International, 10% U.S. bonds, and 10% government securities (TSP G fund), that leaves only 5% for REIT's. As I see it, I have two options that I would be willing to implement:

1.
Reduce the G fund to 5% of my portfolio, but it's such a great option for cash and never loses money. I'm not excited about doing that.

2.
Reduce International Stocks to 10% of my total portfolio (currently 15% of portfolio and 20% of global equity portfolio). Then International Stocks would be about 14% of my global equity portfolio, and I'd have a very pretty 60/10/10/10/10 AA. I'll think about it and maybe do that. I know that Bogleheads and Vanguard are now advocating up to 40% of a portfolio in International Stocks, but I still go with Bogle, who wrote in "Common Sense" that a global equity portfolio should be no more than 20% International Stocks. I'm at that limit now. I could easily reduce this to 14% and bump REITs from 5% to 10% of my total portfolio.

I shall think about these things...
Last edited by M_to_the_G on Sat Jul 13, 2013 1:37 am, edited 2 times in total.
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Re: REITS

Postby HongKonger » Sat Jul 13, 2013 1:11 am

I hold 20% REITS. I use individual REITs that are solely in the Asian retail sector. Mine are amongst my portfolio's star performers as retail in the West is stagnant and brands are moving to Asia where the lure of ever growing middle classes is creating massive continued demand for shopping malls.
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Re: REITS

Postby CaliJim » Sat Jul 13, 2013 1:26 am

Post a copy of your IPS to this thread. I'll read it and then let you know if you should buy into REITS at this time.
You have a written IPS - right?
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Re: REITS

Postby M_to_the_G » Sat Jul 13, 2013 2:08 am

Actually, the more I think about it, the less excited I am about upping REIT's from 5% to 10% or more. REIT's are already a part of the U.S. total stock market indexes, right? So 5% actually becomes something like 7% in a "lazy portfolio" if you add VGSIX or VGSLX at 5% of total portfolio. Since REIT's are only something like 3% of actual stocks in the U.S. market, I don't see the point. I'll keep my REIT holdings as VGSLX in my ROTH at 5% of portfolio.
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Re: REITS

Postby Call_Me_Op » Sat Jul 13, 2013 7:40 am

Quickfoot wrote:It has a risk profile but to say it has the same risk profile as normal equities is inaccurate.


Note that I did not say it has the "same" risk profile, I said it has a similar risk profile. If anything, REITs tend to be more volatile because they concentrate in a single industry. Of course, the correlations fluctuate - just as they would if you compared any single industry to the entire equity universe. (I hope you are aware the the Wilshire 5000 equity index already includes a majority of publicly-traded US REITs. http://en.wikipedia.org/wiki/Wilshire_5000)
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Re: REITS

Postby ruralavalon » Sat Jul 13, 2013 7:50 am

diyinvestor wrote:I want to add Vanguard's REIT index to my portfolio for a long term hold for diversification. Is now a good time to step in?

In my opinion, any investing question with the word "time" in it is the wrong question.

I don't know if this is a good time to buy.

The question should be do I want the fund in my portfolio for some sensible reason, like: more effective diversification; or some inflation protection; or because it acts differently than other stocks; or because of high dividends? Can I wait out poor performance, if it does worse than the overall market for awhile?

We do own the fund so I'm not knocking it, just suggesting you ask yourself why you want it.
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Re: REITS

Postby Tom_T » Sat Jul 13, 2013 7:56 am

There is no such thing as a "good time to buy", because that can only be known in hindsight. Asking if it's a good time is really asking, "In your opinion, will an investment in REITs today make money or lose money, and over what time period?" And even the REIT "experts" will give conflicting opinions. Someone will be right, someone will be wrong. We just don't know who.
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Re: REITS

Postby Kevin M » Sat Jul 13, 2013 5:46 pm

M_to_the_G wrote:Hmm.... that is a compelling argument, but bumping REIT's up to 10% or more would mean reducing something else.

Just FYI, I include US REITs as a subset of my US stock allocation, just as I do with US small-cap value etc. If I owned foreign REITs I'd include them as a subset of my international stock allocation.

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Re: REITS

Postby nedsaid » Sat Jul 13, 2013 6:42 pm

REITs have been bid up and now yield about 3%. Normally these yield closer to 6%. These have been bid up because of investors' search for yield and do not represent a great value here.

Nevertheless, these are great diversifiers because of their low correlation to stocks. Low correlation with similar returns. If you are committed to having these as part of your portfolio for the diversification benefits, then go ahead. Don't expect to make a killing on these.

Keep in mind, these can be extremely volatile. I have seen these fluctuate as much as 10% in one day.

I have owned REITs funds and Timber REITs for a long time and they have been magnificent investments. But I owned these before they were "cool".
A fool and his money are good for business.
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Re: REITS

Postby abuss368 » Sun Jul 14, 2013 10:54 pm

Invest in REITs and stay the course.
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Re: REITS

Postby CaliJim » Sun Jul 14, 2013 11:52 pm

nedsaid wrote: But I owned these before they were "cool".


Oh Ned! You old hipster! 8-)
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Re: REITS

Postby cheapskate » Mon Jul 15, 2013 10:50 pm

fulltilt wrote:This thread might be interesting to you.

viewtopic.php?f=10&t=115965&p=1688269&hilit=reit#p1688269


To the OP : You must read the above thread before investing.

wbern has said this multiple times before. "Being a Boglehead does not absolve us from the responsibility of taking a stab at estimating Expected Returns".
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Re: REITS

Postby inbox788 » Mon Jul 15, 2013 11:53 pm

diyinvestor wrote:I want to add Vanguard's REIT index to my portfolio for a long term hold for diversification. Is now a good time to step in?

Yes.

"And if not now, when?"
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