BogleInvestorLondon wrote:I noticed that Rick would include TIPS and REIT's (both of which I do not have). If owning your own property, I guess you get exposure that way to any price appreciation. Also (just for my own knowledge) do you know how investing in REIT's fare generally compared to simply buying and renting out properties yourself?
Consider that long term broadly long dated gilts (treasury) prices yield 0% nominal, but pay interest that broadly paces inflation. Cash (short duration gilts) broadly pay interest that paces inflation. Gold - paces inflation. House prices - pace inflation. Share prices excluding dividends - pace inflation. Each of those however do so with varying levels of volatility.
Add on stock dividends and stocks appear to be the more attractive overall choice - especially as dividend values also broadly tend to rise with inflation.
However, if you live in a owned home you avoid having to pay rent. You could sell, invest the proceeds in stocks and the dividend might cover the rent on a equivalent sized/location home and the share price rises might broadly compare to house price rises. In effect your home is stock-like, having a price that rises with inflation and provides a imputed 'dividend' (rent not paid).
Land or a home can yield dividends, grow crops that are sold, renting a property or garage out, or imputed dividend via rent not paid.
Also consider human capital. If you work or have a pension of say £12,000 (around $20,000 US$ - arbitrary figure for perhaps a minimum barebones cost of living) then that's a form of dividend. If you combine that with 30 years of such spending = £360K which you might invest in inflation bonds (index linked gilts/TIPS). Leaving those bonds as-is (rolling maturing bonds) and you have a capital value that rises with inflation (bonds) and that might be considered as having paid a dividend (human capital £12K wages/pension element).
A third in each of stocks (business), home (land) and cash/reserves (combined with wages/pension), and you have three distinct 'assets' that each can individually provide stock-like rewards - but that are diversified enough to reduce overall 'portfolio' volatility.
£360K in index linked gilts + £12k pension
£360K in a home + avoid paying £12K in rent
£360K in stocks that pay £12K in dividends
In difficult times when stock dividends dry up/decline, you've the bonds to fall back upon. In good times when stock dividends might be above average top bonds up again. Collectively the capital value of the portfolio rises with inflation, and pays 'dividends' that also broadly rise with inflation.
For the last 50 odd years the capital value assuming periodic rebalancing when sizeable deviations away from a third each had occurred generated a 3% real (i.e. exceeded inflation by 3%). Over 100 years the figure was 2% (much of the earlier 1900's saw capital values just broadly pacing inflation, but a dip down below during the lead up to and including the WW1 years). Such that assuming broadly 3.3% average 'dividends' - supplemented with a 2% to 3% real capital gain = total gains were around 5% to 6% (but that includes an element of human capital (wages/pension) of around 12K/(3 x 360K) = 1.1%).
So if you rent, holding some REIT may be a reasonable choice. If you own your home the need to hold some/any REIT's is lower. Inflation bonds/index linked gilts/TIPS can be useful in providing a degree of safety (inflation stable cash-flow (bond draw-down)) when inflation may have risen sharply and the income from all other assets had declined in real terms.
Of course the amounts and weightings to each of the assets will differ according to each investors preferences and/or tax efficiencies. Perhaps Index Linked Gilts in tax efficient (ISA); Home is capital gains tax (CGT) exempt and imputed 'dividend' (rent not paid) is tax efficient. Stock capital gains can be yearly CGT harvested; Dividends can be tax efficient; Barebones cost of living wages/pension can also be tax efficient (£10K/year zero rate tax band). Whilst some might not mind trading up (or down) their home (value), others - who perhaps live in a long standing family home might be more objectionable to moving home (in which case REIT's, ground rents, land, garages ....etc might be 'traded'). As far as I know trading land/residential/commercial properties etc are as equally as rewarding as holding REIT's - but direct/physical may involve more effort/risks - depending upon how you opt to hold physical (tenants can default, if you are your own 'tenant' however then that risk is eliminated etc.).