Stocks / Long-Term Treasures / Gold / REIT - Why Not?

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DarkHelmetII
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Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by DarkHelmetII »

Currently have a fairly vanilla BH portfolio (domestics stocks / total bond / international) however have been looking more at "alternatives." What is wrong with a portfolio of equal splits among Stocks / Long-Term Treasures / Gold / REIT? First and foremost seems to have assets that are fundamentally less correlated than within the typical BH portfolio, secondly further bolstered by favorable back-testing both from 94-2021(https://www.portfoliovisualizer.com/bac ... tion6_2=25) and the 'lost decade' of 2000-2010 (https://www.portfoliovisualizer.com/bac ... tion6_2=25).

Anticipating the objections:
1) Long-Term Treasures - interest rates are at all time lows and can only go up
2) Gold - creates drag in the portfolio
3) REITs - tax inefficient

My Rebuttals
1) Long-Term Treasures - lower correlation to equities and betting on interest rates is timing the market
2) Gold - low correlation, has proven to provide stability over downturns of past decades
3) REITs - hold in tax-deferred accounts

I get it, past performance is no guarantee of future returns. However, why would I necessarily expect a vanilla BH portfolio (domestics stocks / total bond / international) to outperform what is arguably a more diversified portfolio?
dbr
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by dbr »

There is nothing inherently wrong with the alternate portfolio, and on the face of it you wouldn't necessarily expect the BH portfolio to outperform. The results that anyone can actually expect from either choice are uncertain and the probable outcomes overlap significantly. I am not even sure the differences in your PV run from 1994 are even statistically significant. I don't think PV even back 30 years is enough to draw conclusions about these things.

You pays your money and you takes your choice.

One note is that long term Treasuries have had good returns over the last few decades and that might not persist. It is also difficult to know what to think about returns from gold. Lack of correlation is good, but you still need expected return.
delamer
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by delamer »

How is putting 25% percent of your assets into one industry sector — real estate — more diversified than a standard BH index fund portfolio?

Not to mention the gold…

People investing in the BH portfolio don’t expect it to outperform or underperform any given alternative. They are satisfied with a performance that mirrors the overall markets.

As dbr said, you pays your money and you takes your chances. Emphasis on “your.”
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
Topic Author
DarkHelmetII
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by DarkHelmetII »

delamer wrote: Thu Jun 24, 2021 10:10 am How is putting 25% percent of your assets into one industry sector — real estate — more diversified than a standard BH index fund portfolio?

Not to mention the gold…
Great points, and exactly why I have stuck with the BH portfolio. Still, upon my additional reading (e.g., Swedroe's Alt Investments - thank you BH's for pointing these out) to enhance my conceptual understanding, coupled with empirical back-testing (realizing its limitations), I can't help but contemplate. More specifically, yes, REITs are by definition a single sector. But I also see to a degree "faux" diversification among equities in a BH portfolio given the high correlation between large / mid / small cap and even international. REITs are inherently a different beast possessing both equity and bond-like characteristics.

Gold, well yes, definitely undiversified by definition. But when coupled with these other asset classes has proven to be a stabilizing effect.

Thanks for the input. Not making any knee-jerk decisions here, wanted to get feedback.
delamer
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by delamer »

DarkHelmetII wrote: Thu Jun 24, 2021 10:20 am
delamer wrote: Thu Jun 24, 2021 10:10 am How is putting 25% percent of your assets into one industry sector — real estate — more diversified than a standard BH index fund portfolio?

Not to mention the gold…
Great points, and exactly why I have stuck with the BH portfolio. Still, upon my additional reading (e.g., Swedroe's Alt Investments - thank you BH's for pointing these out) to enhance my conceptual understanding, coupled with empirical back-testing (realizing its limitations), I can't help but contemplate. More specifically, yes, REITs are by definition a single sector. But I also see to a degree "faux" diversification among equities in a BH portfolio given the high correlation between large / mid / small cap and even international. REITs are inherently a different beast possessing both equity and bond-like characteristics.

Gold, well yes, definitely undiversified by definition. But when coupled with these other asset classes has proven to be a stabilizing effect.

Thanks for the input. Not making any knee-jerk decisions here, wanted to get feedback.
Diversification comes in different forms. My concern would be much higher about having too much concentration in one sector than it would be about there being high correlations across market capitalization (and/or international).
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
ruud
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by ruud »

DarkHelmetII wrote: Thu Jun 24, 2021 9:30 am What is wrong with a portfolio of equal splits among Stocks / Long-Term Treasures / Gold / REIT?
You might want to read up on the permanent portfolio which is very similar (but uses cash/T-bills instead of REIT).
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stuper1
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by stuper1 »

Isn't a portfolio that includes stocks, bonds, and gold more diversified than a portfolio that only contains stocks and bonds? Seems pretty simple to me.
26% US large cap, 26% US small-cap value, 15% long-term Treasuries, 15% short-term Treasuries, 18% gold
Topic Author
DarkHelmetII
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by DarkHelmetII »

ruud wrote: Thu Jun 24, 2021 10:47 am You might want to read up on the permanent portfolio which is very similar (but uses cash/T-bills instead of REIT).
Yes, great point. I basically concluded that PP was too conservative for my risk-tolerance and longer time horizon. And so wanted to see what happened if REITs are inserted into the Cash component.
delamer
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by delamer »

stuper1 wrote: Thu Jun 24, 2021 10:48 am Isn't a portfolio that includes stocks, bonds, and gold more diversified than a portfolio that only contains stocks and bonds? Seems pretty simple to me.
A portfolio having a large concentration in any one asset is generally going to be less diversified, whether it’s an industry sector, a specific stock or bond, or a metal.

Having 5% of your portfolio in gold is diversification. Having 25% in gold is overconcentrated.

Obviously, people will differ on where the line is.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
ivgrivchuck
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by ivgrivchuck »

DarkHelmetII wrote: Thu Jun 24, 2021 9:30 am I get it, past performance is no guarantee of future returns. However, why would I necessarily expect a vanilla BH portfolio (domestics stocks / total bond / international) to outperform what is arguably a more diversified portfolio?
It sounds like that you might be interested in the Golden Butterfly portfolio:

40%: Stocks
20%: Long term treasuries
20%: Short term treasuries ("cash")
20%: Gold

It is a solid portfolio with really favorable backtesting metrics.

Look: There are hundreds of different kinds of good portfolios. Nobody has ever claimed that the 3-fund is the best. But it's a simple and safe solution and "good enough" for most people. You can build your own, but it requires skill and understanding.
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
ivgrivchuck
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by ivgrivchuck »

stuper1 wrote: Thu Jun 24, 2021 10:48 am Isn't a portfolio that includes stocks, bonds, and gold more diversified than a portfolio that only contains stocks and bonds? Seems pretty simple to me.
Portfolio with stocks, bonds and X is by definition more diversified than stocks and bonds alone. Even if X is Zimbabwe dollars.

Note that I am by no means saying that holding gold is bad (I'm not currently holding any, but I might hold some in the future), but diversification alone is not a sufficient argument to hold any asset.
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
dbr
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by dbr »

Probably a better way to ask a question like this is to ask why rather than why not. Put differently, why would one expect that there is one special set of assets to hold that is just better than anything else all the time? More likely Dublin is still Dublin and in the same place it always has been.
ivgrivchuck
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by ivgrivchuck »

DarkHelmetII wrote: Thu Jun 24, 2021 9:30 am 3) REITs - tax inefficient
Another "objection" is that REITs are already included in the Total Stock market. So by buying them you are overweighting real estate. Overweighting reduces diversification instead of increasing it.

And why is it specifically real estate that you want to overweight? Why not healthcare, technology or energy?

Note that in the past there was a time in the past when REITs very clearly decorrelated from the the stock market. Back then holding REITs made a lot of sense. Now those times are gone...
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
stuper1
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by stuper1 »

delamer wrote: Thu Jun 24, 2021 11:52 am
stuper1 wrote: Thu Jun 24, 2021 10:48 am Isn't a portfolio that includes stocks, bonds, and gold more diversified than a portfolio that only contains stocks and bonds? Seems pretty simple to me.
A portfolio having a large concentration in any one asset is generally going to be less diversified, whether it’s an industry sector, a specific stock or bond, or a metal.

Having 5% of your portfolio in gold is diversification. Having 25% in gold is overconcentrated.

Obviously, people will differ on where the line is.
One purpose of gold in a portfolio is to be a proxy for commodities. The global stock market is valued at something like $100 trillion, as is the global bond market. What is the value of the global commodities market? I tried to find an estimate, but couldn't find a good one although one source said it would be hundreds of trillions of dollars. If that is true, then a person could arguably hold more gold than stocks without being overconcentrated.
26% US large cap, 26% US small-cap value, 15% long-term Treasuries, 15% short-term Treasuries, 18% gold
delamer
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by delamer »

stuper1 wrote: Thu Jun 24, 2021 1:43 pm
delamer wrote: Thu Jun 24, 2021 11:52 am
stuper1 wrote: Thu Jun 24, 2021 10:48 am Isn't a portfolio that includes stocks, bonds, and gold more diversified than a portfolio that only contains stocks and bonds? Seems pretty simple to me.
A portfolio having a large concentration in any one asset is generally going to be less diversified, whether it’s an industry sector, a specific stock or bond, or a metal.

Having 5% of your portfolio in gold is diversification. Having 25% in gold is overconcentrated.

Obviously, people will differ on where the line is.
One purpose of gold in a portfolio is to be a proxy for commodities. The global stock market is valued at something like $100 trillion, as is the global bond market. What is the value of the global commodities market? I tried to find an estimate, but couldn't find a good one although one source said it would be hundreds of trillions of dollars. If that is true, then a person could arguably hold more gold than stocks without being overconcentrated.
Holding a single proxy for commodities is different than holding a basket of different commodities. We’re back to the diversification issue.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
tomsense76
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by tomsense76 »

Yep lots of variants on this. Some have already mentioned permanent portfolio and golden butterfly. If you have already, would check out ( https://portfoliocharts.com ), which includes these and others with some interesting posts on portfolio construction. It's a great resource

With Gold, I think the normal hope has been this would be an inflation hedge, but recently it seems to have performed better as a deflation hedge and only on the order of centuries does it act as an inflation hedge. So it's a fair question whether this belongs in an individual's portfolio. Here's a good podcast episode on it ( https://rationalreminder.ca/podcast/111 ). It's worth noting long-term treasures also work as a deflation hedge. So one question might be does one need both? A second question would be, if gold isn't a good inflation hedge, what should be held instead? Cash, Short TIPs, T-Bills, or something else? I suspect a lot of Bogleheads see that once one combines short duration bonds with long duration bonds to cover these two scenarios they just average to intermediate term, which is what total bond already does.

With REITs others have mentioned these are in total stock market, which is true (though it is a very small amount). A bigger question here is, do they behave sufficiently differently from stocks? There are some good threads on this. In particular this one ( viewtopic.php?t=51903 ). Another question that comes up with them is if they are just a poor substitute for a small cap value tilt ( viewtopic.php?t=1208 ) ( https://www.pwlcapital.com/reconsiderin ... portfolio/ ) Something else worth noting is people use to be big fans of REITs particularly pre-GFC. After GFC they didn't get quite the same amount of love. If we dig into the data, it becomes pretty clear why. While the US stock market saw a ~50% decline during GFC, REITs saw a ~70% decline. Not only did they both dive at the same time (something I suspect REIT owners wanted to avoid), the pain was more pronounced in REITs. Since then there have been fewer people advocating for them.
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Triple digit golfer
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by Triple digit golfer »

Gold is a shiny metal with no intrinsic value that has barely kept up with inflation long term.

REITs are held at market weight and I see no reason to overweight them.
chrisdds98
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by chrisdds98 »

DarkHelmetII wrote: Thu Jun 24, 2021 9:30 am Currently have a fairly vanilla BH portfolio (domestics stocks / total bond / international) however have been looking more at "alternatives." What is wrong with a portfolio of equal splits among Stocks / Long-Term Treasures / Gold / REIT? First and foremost seems to have assets that are fundamentally less correlated than within the typical BH portfolio, secondly further bolstered by favorable back-testing both from 94-2021(https://www.portfoliovisualizer.com/bac ... tion6_2=25) and the 'lost decade' of 2000-2010 (https://www.portfoliovisualizer.com/bac ... tion6_2=25).

Anticipating the objections:
1) Long-Term Treasures - interest rates are at all time lows and can only go up
2) Gold - creates drag in the portfolio
3) REITs - tax inefficient

My Rebuttals
1) Long-Term Treasures - lower correlation to equities and betting on interest rates is timing the market
2) Gold - low correlation, has proven to provide stability over downturns of past decades
3) REITs - hold in tax-deferred accounts

I get it, past performance is no guarantee of future returns. However, why would I necessarily expect a vanilla BH portfolio (domestics stocks / total bond / international) to outperform what is arguably a more diversified portfolio?
during your backtesting dates LTTs performed great as interest rates continued falling. That performance might continue in the future but I think there will be resistance for the US to have negative nominal rates on LTTs
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Beensabu
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by Beensabu »

DarkHelmetII wrote: Thu Jun 24, 2021 11:01 am
ruud wrote: Thu Jun 24, 2021 10:47 am You might want to read up on the permanent portfolio which is very similar (but uses cash/T-bills instead of REIT).
Yes, great point. I basically concluded that PP was too conservative for my risk-tolerance and longer time horizon. And so wanted to see what happened if REITs are inserted into the Cash component.
Before you go swapping out components, figure out why each part of the permanent portfolio is in the portfolio in the first place. It's not just less correlated assets. Each component has a purpose. Each component is expected to act in a particular way in certain economic conditions because of the nature of that investment itself. The reason that portfolio has the "permanent" moniker is because it's meant to do alright throughout all economic conditions (i.e. smaller drawdowns in bear markets and decent enough gains in bull markets).

And what role exactly do REITs play in a portfolio? They are not a stock/bond hybrid. They are not a bond alternative. They are stocks. A specific sector of stocks. How are they expected to behave in various conditions? Definitely not like cash. More like stocks. Because they're stocks.

Swapping out cash for REITs isn't a more aggressive version of the permanent portfolio. It's a different portfolio entirely. Once you do that, you've just lost the whole reason anyone opts for the permanent portfolio in the first place (i.e. reducing losses during a stock market downturn).

So what you are thinking about is essentially:

50% stocks (including a 50% sector bet)
25% long term treasuries
25% gold

I'm not saying if that's good or bad. Just be aware that is what it actually is and don't trick yourself into thinking it's something different than that.

And maybe take a moment to think about why each part of the three-fund portfolio is in the portfolio in the first place? What is each of these doing there and how do they work together?
domestics stocks / total bond / international
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by Gaston »

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Capster1
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Re: Stocks / Long-Term Treasures / Gold / REIT - Why Not?

Post by Capster1 »

I agree with you 100% on treasuries, hence why I hold them.

I don't know percentages off hand, but I know I have over 5% in REITs. I like them at the moment due to the correction; however, in a few years I'm probably gonna change my mind and say, they just aren't that uncorrelated to the market. VGSLX vs. VTSAX; 0.7+ correlation. REIT's also tend to suffer from worse max drawdowns.

I have a tiny portion of gold in my portfolio. I wished I could warm up to it, but I haven't much. Mainly because the backtesting and research I've done leaves me feeling inconclusive. I do have 4% in silver, but I bought it at a long time ago at $7.05 an ounce; it's not something I'd buy now.
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