Why only 5-10% for REITs?

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InvestorNewb
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Why only 5-10% for REITs?

Post by InvestorNewb » Tue Aug 06, 2013 2:30 pm

Hello,

Given that U.S. REITs have outperformed the S&P 500 for the last 40 years, why is it that people continue to recommend that they only account for 5-10% of your overall portfolio? Surely 40 years is a sufficiently long period to make rational investing decisions.

I know that some people will say "past performance doesn't equal future performance, blah blah". But let's be honest, we all look at past performance before investing.

There is an interesting chart that compares REITs to the S&P 500 index at:
http://www.havermannfinancial.com/hf_ne ... investors/

(The author says that after taxes, the returns to both asset classes are about equal.)

My point is that if you have the tax-advantaged space, why not max it out with REITs? Why only 5-10% given the supporting data?
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

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Re: Why only 5-10% for REITs?

Post by mike_slc » Tue Aug 06, 2013 2:37 pm

If you had REITs in your portfolio in 2008 you might not be asking this question. The volatility was sickening. 20% moves in either direction on a daily basis.

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Re: Why only 5-10% for REITs?

Post by Call_Me_Op » Tue Aug 06, 2013 2:38 pm

InvestorNewb wrote: Given that U.S. REITs have outperformed the S&P 500 for the last 40 years, why is it that people continue to recommend that they only account for 5-10% of your overall portfolio? Surely 40 years is a sufficiently long period to make rational investing decisions.
Microcap stocks have outperformed as well, but we limit our investment in them. The reason is the same - they represent a small fraction of world-wide capitalization and tend to be very volatile. You don't want to make too big a bet in one sector. Past performance does not guarantee future results, even 40 years of past performance.
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Re: Why only 5-10% for REITs?

Post by SimpleGift » Tue Aug 06, 2013 2:48 pm

REITs lost two-thirds of their value in the 2008 market meltdown (red line in chart below). There was no guarantee at the time that their price would ever recover. How would you feel in 2008 if you had "maxed out" your tax-advantaged space with just REITs?

Image
Source: Vanguard: REITs — A Word of Caution

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Cordially, Todd

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Re: Why only 5-10% for REITs?

Post by YttriumNitrate » Tue Aug 06, 2013 3:02 pm

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Re: Why only 5-10% for REITs?

Post by SimpleGift » Tue Aug 06, 2013 3:14 pm

YttriumNitrate wrote:
Simplegift wrote:REITs lost two-thirds of their value in the 2008 market meltdown (red line in chart below). There was no guarantee at the time that their price would ever recover. How would you feel in 2008 if you had "maxed out" your tax-advantaged space with REITs
To play devil's advocate, I'd say:

The S&P500 lost (1.70)-thirds of their value in the 2008 market meltdown (blue line in chart below). There was no guarantee at the time that their price would ever recover. How would you feel in 2008 if you had "maxed out" your tax-advantaged space with S&P500
Personally, I don't "max out" my portfolio with anything. I'm one of those investors who has no idea which risk assets will do well in the future and which will do poorly. So I spread my investments among as many diverse and less-than-perfectly correlated risk assets as I can (including a 5% allocation to REITs).
Cordially, Todd

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Re: Why only 5-10% for REITs?

Post by BuckyBadger » Tue Aug 06, 2013 3:19 pm


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Re: Why only 5-10% for REITs?

Post by Red Rover » Tue Aug 06, 2013 3:33 pm

Simplegift wrote:REITs lost two-thirds of their value in the 2008 market meltdown (red line in chart below). There was no guarantee at the time that their price would ever recover. How would you feel in 2008 if you had "maxed out" your tax-advantaged space with just REITs?

Image
Source: Vanguard: REITs — A Word of Caution

“The only investors who shouldn’t diversify are those who are right 100% of the time.” Sir John Templeton
By the look of that chart, a buy and hold strategy of REIT would be looking pretty good in 2011. :wink:

I just moved my equity investments two weeks ago to 4 Vanguard funds including Total Stock Market, Total Int'l Stock market, Small Cap Value, and REIT. The REIT is already down 5%, but I am still up overall. i hope this means that the REIT correlation with "regular" equities is what i hoped, and the REIT will do well when the current market backs off from these highs as it surely must. If it doesn't, well i guess that's even better.

I capped REIT at 15% of my equities based on the volatility that was already mentioned. I may adjust that down to 10% of equities in January when I make another big allocation from a pension account rollover into my 457 plan where the Vanguard funds are.

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Re: Why only 5-10% for REITs?

Post by jerome99 » Tue Aug 06, 2013 3:42 pm

What does the results in 2008 have to do with how much REITs should be in a portfolio?

With buy and hold, one would be in better shape as they would have been moving more into REITs at a lower value as they kept their AA, correct?

How much exposure does one get in REITs or like assets by owning the TSM? Stocks like Simon Property, General Growth have to contribute to this.

Is there a % that Ferri or the like recommend in REIT for the average investor?

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Re: Why only 5-10% for REITs?

Post by Clearly_Irrational » Tue Aug 06, 2013 3:44 pm

Well, I have zero REITS which is due to the fact that I prefer to hold real estate directly.

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Re: Why only 5-10% for REITs?

Post by avalpert » Tue Aug 06, 2013 4:17 pm

It's quite amusing to hear someone who just a month ago was struggling with how he could stick to his plan because of a tiny little dip now ask why he should chase a highly volatile asset class.

I sense a future performance chaser here.

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Re: Why only 5-10% for REITs?

Post by patrick » Tue Aug 06, 2013 4:41 pm

Is only 40 years enough? The evidence for the small value premium goes back more than twice that long yet some still doubt.

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Clearly_Irrational
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Re: Why only 5-10% for REITs?

Post by Clearly_Irrational » Tue Aug 06, 2013 4:50 pm

patrick wrote:Is only 40 years enough? The evidence for the small value premium goes back more than twice that long yet some still doubt.
There isn't really enough data for any of the available assets, I'd say 40 years is enough to make an educated guess though.

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Re: Why only 5-10% for REITs?

Post by kenyan » Tue Aug 06, 2013 4:56 pm

Red Rover wrote:
By the look of that chart, a buy and hold strategy of REIT would be looking pretty good in 2011. :wink:
Charts can be misleading. Instead of the cherry-picked buy-and-hold from 1991 to 2011, I did a quick calculation of a simple but more realistic scenario where someone contributed $100 every year on August 5 from 2001 to 2013. I selected 2001 since the lines appear to cross around that time.

Comparing TSM to REIT with someone who was contributing every year, the results were: REIT $2318, TSM $2170. Not nearly so impressive, eh?
Retirement investing is a marathon.

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Re: Why only 5-10% for REITs?

Post by TomatoTomahto » Tue Aug 06, 2013 4:57 pm

avalpert wrote:It's quite amusing to hear someone who just a month ago was struggling with how he could stick to his plan because of a tiny little dip now ask why he should chase a highly volatile asset class.

I sense a future performance chaser here.
What do you mean future? No time like the present :twisted:

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Re: Why only 5-10% for REITs?

Post by Ice-9 » Tue Aug 06, 2013 4:58 pm

I recall reading something by William Bernstein noting that the Talmud recommended dividing one's portfolio into a third each of land, business, and cash. So, if that portfolio appeals to you, I suppose you could be 33.3% REIT. :happy

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Clearly_Irrational
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Re: Why only 5-10% for REITs?

Post by Clearly_Irrational » Tue Aug 06, 2013 5:04 pm

Ice-9 wrote:I recall reading something by William Bernstein noting that the Talmud recommended dividing one's portfolio into a third each of land, business, and cash. So, if that portfolio appeals to you, I suppose you could be 33.3% REIT. :happy
I do something like that. I try to roughly balance rent, interest and profits. (economic definitions) I consider it a form of meta-diversification.

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Re: Why only 5-10% for REITs?

Post by Randomize » Tue Aug 06, 2013 5:07 pm

REITs are already part of VTI. That's enough for me.

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Re: Why only 5-10% for REITs?

Post by gkaplan » Tue Aug 06, 2013 5:15 pm

InvestorNewb wrote:Hello,

Given that U.S. REITs have outperformed the S&P 500 for the last 40 years, why is it that people continue to recommend that they only account for 5-10% of your overall portfolio? Surely 40 years is a sufficiently long period to make rational investing decisions.

I know that some people will say "past performance doesn't equal future performance, blah blah". But let's be honest, we all look at past performance before investing.

There is an interesting chart that compares REITs to the S&P 500 index at:
http://www.havermannfinancial.com/hf_ne ... investors/

(The author says that after taxes, the returns to both asset classes are about equal.)

My point is that if you have the tax-advantaged space, why not max it out with REITs? Why only 5-10% given the supporting data?
What does your IPS say?
Gordon

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Re: Why only 5-10% for REITs?

Post by YttriumNitrate » Tue Aug 06, 2013 5:19 pm

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Re: Why only 5-10% for REITs?

Post by MoonOrb » Tue Aug 06, 2013 5:29 pm

My rationalization is:

(1) My goal is--to the extent possible--to make my holdings approximate the market. I content myself with my fair share of the market.

(2) I already have some real estate exposure because I own a home. While I don't think of or treat my home as an investment in the same way I think of the mutual funds that I hold, I realize that I am unlikely to live in my home until I die, and at some point in the future I'll sell it.

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Re: Why only 5-10% for REITs?

Post by MrMatt2532 » Tue Aug 06, 2013 10:08 pm

My thinking is if you don't tilt towards SV, REITS up to 20% of equities is ok, otherwise around 10% is probably best.

So, these would be my main alternatives for splitting my equities/risky assets:
1)
40% US TSM
40% Intl TSM
20% REITS (potentially split between US/Intl)

2)
22.5% US TSM
22.5% US SV
22.5% Intl TSM
22.5% Intl SV
10% REITS (potentially split between US/Intl)

or to get really fancy:
3)
20% US TSM
20% US SV
20% Intl TSM
20% Intl SV
10% REITS (potentially split between US/Intl)
10% CCFs/Commodities

Full disclosure: I use portfolio 3, but I consider the other portolios listed as great alternatives.

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Re: Why only 5-10% for REITs?

Post by nedsaid » Tue Aug 06, 2013 10:29 pm

A fund of REITs that drops 8-10% in one day is an indication of a very volatile investment. The volatile asset classes like REITs put a "Tiger in your tank." But too much and you risk blowing up your portfolio. Do you really want that much volatility in your portfolio? I think not.

It is like the guys who want their equities 100% in small cap value. It is hard for me to wrap my brain around things like that.

Yes, these risky asset classes have high returns. But the distribution of those returns are highly uneven. Even more so than for a broad stock index.
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Re: Why only 5-10% for REITs?

Post by John3754 » Tue Aug 06, 2013 10:36 pm

You lost your cool when the market dipped 5%, that's why you shouldn't "max out" your tax advantaged space with REITs, and why you probably shouldn't be in 100% equity either.

If you want to "max out" your portfolio with highly volatile asset classes because they've yielded the highest historic returns then stop posting about it week after week and just do it, but don't come crying to us when the next bear market comes and your portfolio loses 50% of it's value.

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Re: Why only 5-10% for REITs?

Post by Kalo » Tue Aug 06, 2013 10:53 pm

Randomize wrote:REITs are already part of VTI. That's enough for me.
Does anyone know or have links that quantify this effect?

Kalo
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Re: Why only 5-10% for REITs?

Post by nisiprius » Wed Aug 07, 2013 6:30 am

InvestorNewb wrote:Given that U.S. REITs have outperformed the S&P 500 for the last 40 years, why is it that people continue to recommend that they only account for 5-10% of your overall portfolio?
1) It should never be about "return," it should always be about "risk-adjusted return." For example, anyone can beat the S&P 500 by using leverage.

2) The market may not be efficient, but it's efficient enough. Do you really think that one investment can be just plain way better than another for forty years, and that investors have never cottoned on and bid up the price?

There is never a big difference. The differences, if looked at objectively and presented by someone who isn't selling something, always turn out to fall in the strange grey area of maybe, maybe not, hard to tell, might be something to it.

3) So, investornewb, what do you know about commercial real estate? I know bupkis. No matter how much you learn about investing, at any instant in time there are always going to be all sorts of people offering me unfamiliar investments I know nothing about, except what these choose to tell me. And they are always going to say the same thing: look at past performance, more $$$$, more moolah, more spondulix, more of the long green, baby! So at any give point in time I have three choices:

a) Shrug and ignore it, trusting that the market is efficient enough that the unfamiliar investment can't actually be all that much better than the boring old stuff everyone knows about (in particular, the old stuff for which everyone understands the gotchas);

b) Spend an appropriate amount of time really and truly boning up on it;

c) Believe the pitch and inve$t in $omething I don't really under$tand ba$ed on chart$ $howing all the $$$$.

I usually opt for (a), occasionally (b), and try to avoid (c).
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Re: Why only 5-10% for REITs?

Post by JoMoney » Wed Aug 07, 2013 6:59 am

InvestorNewb wrote: Given that U.S. REITs have outperformed the S&P 500 for the last 40 years...
There is an interesting chart that compares REITs to the S&P 500 index at:
http://www.havermannfinancial.com/hf_ne ... investors/
Why select that time period? (I know REITS haven't been around for much longer than that, but really....)
I assert that REITS have significantly UNDERPERFORMED the market for most of the past 30 years, and only recently gained any traction.. here's my chart:
Image
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Re: Why only 5-10% for REITs?

Post by RNJ » Wed Aug 07, 2013 8:00 am

From the OP's previous REIT thread:
InvestorNewb wrote:Hello,

I'm not *seriously* planning on doing this, but I thought I would post it anyways...

I once toyed with the idea of going 100% into the REIT index fund, VNQ. I calculated that based on my savings, the dividends alone would provide me with income that is equal to about 50% of what I earn at my day job. Now, suppose I reinvested all dividends back into the same fund for 20-30 years - imagine the future potential income that you could get from the dividends alone. You wouldn't even have to worry about your original principle going up or down if you never plan on spending it.

Some of my other thoughts on this are:

- There are more millionaires in real estate than any other industry
- Many landlords are 100% real estate; I know a few that despise the stock market completely
- Folks like Donald Trump are likely very close to being 100% real estate
- Over long periods, REITs have similar returns (slightly above) those of the S&P 500 index
- Price volatility is not as troubling knowing that you will receive $x per year in dividend income
- Even when the market tanked in 2008, with REITs being hit the hardest, they were still giving high dividends
- Imagine the volume of shares you can accumulate over time simply by reinvesting the dividends

I know this would be contrary to the Boglehead philosophy, but would such a plan ever make sense?

The "millionaires' you cite didn't make their millions in REITS - they own, manage and/or develop actual real estate. Why not simply cash out completely and buy some real estate?

And unless you have inherited (or plan to inherit) a massive fortune and real estate empire, Donald Trump may not be your best exemplar. In fact, given the number of bankruptcies he's been a party to, he may have done better by putting his inheritance in an S&P 500 index fund and spending his time playing polo.

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Re: Why only 5-10% for REITs?

Post by bertilak » Wed Aug 07, 2013 10:11 am

To the OP:

Ask yourself this question:
What is the maximum percentage of your portfolio that should be concentrated in ANY sector?
Before giving a quick answer read a little about MPT -- Modern Portfolio Theory. Be sure you understand the points it makes about diversification.
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Re: Why only 5-10% for REITs?

Post by Clearly_Irrational » Wed Aug 07, 2013 11:10 am

RNJ wrote:
InvestorNewb wrote:- There are more millionaires in real estate than any other industry
- Many landlords are 100% real estate; I know a few that despise the stock market completely
The "millionaires' you cite didn't make their millions in REITS - they own, manage and/or develop actual real estate. Why not simply cash out completely and buy some real estate?
I have to agree. I like real estate and my original research into how people get rich seemed to often return stories that sounded like "Well, I do this thing now but I made all my first money in real estate". Direct ownership has significant number of advantages and that's why those people were able to make such large sums of money, REITs just don't have the same kind of effect.

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Re: Why only 5-10% for REITs?

Post by zaboomafoozarg » Wed Aug 07, 2013 8:29 pm

Your posts always entertain, Newb :)

Too much of good thing can be a bad thing.

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Re: Why only 5-10% for REITs?

Post by JoMoney » Wed Aug 07, 2013 9:39 pm

I also know many wealthy people who "made their money" in real estate... but I think a case could be made for survivorship bias and the effect of the location of that real estate. Most of the people I know did it owning real estate in California from fifty years ago. People tend to forget/dismiss all the people who lost a ton of money in leveraged real estate. I can't find the link, but there was a Yahoo news story about a lottery millionaire who blew through a $10million windfall, and most of it went trying to cover losses from getting involved with a bunch of leveraged real estate.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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JoMoney
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Re: Why only 5-10% for REITs?

Post by JoMoney » Thu Aug 08, 2013 4:22 am

Kalo wrote:
Randomize wrote:REITs are already part of VTI. That's enough for me.
Does anyone know or have links that quantify this effect?

Kalo
I couldn't find anything other than this :
http://www.bogleheads.org/wiki/Percenta ... ndex_Funds
It hasn't been updated for awhile. I was curious too, but couldn't find anything recent.

I downloaded the excel spreadsheets of the mothly holdings for some IShares funds (their data are easier to play with than Vanguards).
IYY (iShares Dow Jones U.S. ETF) and IYR (iShares U.S. Real Estate ETF)
I deleted everything but the ticker symbols and the percentage of holdings in IYY
Then deleted all of the stock symbols that were not listed in IYR
Added up the percentage of holdings in IYY that overlapped in IYR came up with 3.26%
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Why only 5-10% for REITs?

Post by georgewall42 » Thu Aug 08, 2013 9:15 am

With regards to "making money in real estate" and investing in REIT's, some things to keep in mind:

1.) Real estate investing (aka, buying real estate other than your primary residence) is one of the easiest businesses to get into as an individual. All you need to start is a modest amount of capital, good credit, and some sweat equity. Commercial real estate requires more capital, but even breaking into that business is not as hard as, say, building a car factory.

2.) The real estate industry is still very localized and fragmented. There's no WalMart of landlords.

3.) There are 40 million renter occupied homes in the US.

4.) Because of these factors, there are a lot of individuals that are invested in some way, shape or form in real estate. Some landlords obviously own more than one investment property, but doing a quick google search lead me to a site that estimated 12M landlords in the US. That's a lot of real estate businesses, and that number does not include commercial real estate.

5.) Not all of these 12M people become millionaires. In fact, most do not, although many do find that their real estate investments have afforded them some level of retirement income that would otherwise be impossible. Real estate historically has earned returns that keep pace with inflation, or moderately outpace it by a point or so, and do it with the easy availability of credit, leverage, and favorable tax treatments.

6.) There are also folks that overextend themselves and end up losing big money. There were 1.2M bankruptcies filed in the past 12 months; not all of them were real estate investors, but some probably were. Most people who lost their shirts in real estate don't brag about it at cocktail parties.

7.) Being a landlord is like running your own business, which comes with all the glory and pitfalls associated with it. Blundering into real estate investment without considering this point is what often ends up getting folks in trouble.

8.) Owning REITs, or REIT funds, is far different from being a landlord. The good news is that you don't have to deal directly with tenant issues. However, by owning a REIT fund, you are investing in one sector of the US economy: commercial real estate. Individual sectors can go dormant for quite some time. If you bought that REIT fund at the start of the 1990's, you would probably not be too happy come the start of 2001. In fact, you would still be behind the S&P500 as of today.

REIT's do have a role for those that want them. They do provide income, and can provide some level of diversification as they are not perfectly correlated with stocks. And you don't have to restart the furnace at 2 in the morning. But going all in to REIT's is not much different than going 100% into any individual sector the economy; you've just exposed yourself to a significant amount of industry specific risk, and the return for that exposure is not necessarily going to compensate you for that risk.

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Re: Why only 5-10% for REITs?

Post by Sammy_M » Thu Aug 08, 2013 11:28 am

Nice post, georgewall42

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Re: Why only 5-10% for REITs?

Post by NateH » Thu Aug 08, 2013 12:24 pm

JoMoney wrote:
Kalo wrote:
Randomize wrote:REITs are already part of VTI. That's enough for me.
Does anyone know or have links that quantify this effect?

Kalo
I couldn't find anything other than this :
http://www.bogleheads.org/wiki/Percenta ... ndex_Funds
It hasn't been updated for awhile. I was curious too, but couldn't find anything recent.

I downloaded the excel spreadsheets of the mothly holdings for some IShares funds (their data are easier to play with than Vanguards).
IYY (iShares Dow Jones U.S. ETF) and IYR (iShares U.S. Real Estate ETF)
I deleted everything but the ticker symbols and the percentage of holdings in IYY
Then deleted all of the stock symbols that were not listed in IYR
Added up the percentage of holdings in IYY that overlapped in IYR came up with 3.26%
Morningstar says that Real Estate is 3.6% of VTI.
REIT it is 17.4% of VG Small Cap Value fund
4X top-twenty S&P 500 prognosticator. I'd start a newsletter, but it would only have one issue per year.

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Re: Why only 5-10% for REITs?

Post by czeckers » Thu Aug 08, 2013 1:03 pm

The answer to your question of why not more REITs in a portfolio is answered very nicely in this recent post by Dr. Bernstein here.

The current yield for the VG REIT index is 3.45. Based on the scatter plot in his post, the 5-year forward real yield when starting from such a low yield has always been less than zero.

REITs have done quite well overall in the last 13 years but people like the OP who have been chasing the recent outperformance of this investment category have been piling in thus bidding up the price and thereby reducing the yield. Starting with the current yield going forward, past performance is certainly not predictive of future performance (except possibly in the inverse).

I hope this helps.

-K
The Espresso portfolio: | | 16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."

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Re: Why only 5-10% for REITs?

Post by Valuethinker » Fri Aug 09, 2013 2:50 am

InvestorNewb wrote:Hello,

Given that U.S. REITs have outperformed the S&P 500 for the last 40 years, why is it that people continue to recommend that they only account for 5-10% of your overall portfolio? Surely 40 years is a sufficiently long period to make rational investing decisions.

I know that some people will say "past performance doesn't equal future performance, blah blah". But let's be honest, we all look at past performance before investing.

There is an interesting chart that compares REITs to the S&P 500 index at:
http://www.havermannfinancial.com/hf_ne ... investors/

(The author says that after taxes, the returns to both asset classes are about equal.)

My point is that if you have the tax-advantaged space, why not max it out with REITs? Why only 5-10% given the supporting data?
I sense a prediliction to state extreme cases to provoke strong responses.

You don't REALLY need another explanation of the benefits of diversification DO YOU?

30 seconds thinking about the volatility of REITs will answer your question.

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LH
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Re: Why only 5-10% for REITs?

Post by LH » Fri Aug 09, 2013 5:06 am

I have 13 percent REIT.

Swenson I think said up to 20 percent at one point.

I think Talmud one third land, one third business one third reserve still holds true today.

Nothing fundamentally has changed. I consider 1/3 as a reasonable upper bound of net worth in terms of land.

There are two concepts that bear thought on this topic.

1) ones asset allocation
2) ones net worth

I think in terms of net worth mainly. One cannot rebalance all of net worth, so AA has to be considered practically.

My REIT plus my home is about 1/3rd my net worth.

In the end, net worth is what counts. If you have an asset allocation of 1 million, plus:
1) debts totaling 500k
Or
2) a home worth 500k

Two vastly different situations.

A asset allocation is a big numbers of the trees in the forest, but the forest is the net worth.

In sum, I think if you own a home, ( which can go underwater) you should consider that in how much exposure to real estate.

If you rent, maybe go to twenty percent REIT,if you understand the volatility, understand its FFO not PE, etc tc of REIT.

Or if you own a home, but it's small part relative to AA, then goto 20 REIT in AA.


But normally, the home is a big big part of net worth [ or ones liabilityif home goes underwater (gets into recourse no recourse etc) ]. So to me, that factors into why it's usually only 5 to 10 percent in AA ......

When you go higher that 5 to 10 percent, on average, your net worth exposure to Real estate may be pretty high, too high. Plus behaviorally, it may be difficult for people to not buy high, sell low REIT due to its leverage/ volatility.

Complex, hope this helps. On average 5 to 10 is a good recommendation fer REIT.

LH

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Re: Why only 5-10% for REITs?

Post by nisiprius » Fri Aug 09, 2013 10:08 am

LH wrote:I think Talmud one third land, one third business one third reserve still holds true today.

Nothing fundamentally has changed. I consider 1/3 as a reasonable upper bound of net worth in terms of land.
Let's not blur the basic nature of investments. A REIT mutual fund is not "land." It is an investment in the stock of corporations that operate commercial real estate. That's at least two steps removed; 1) stock ownership is not real estate ownership; 2) commercial real estate is not land.

It would be bad if I let my personal experience of buying a house led me to believe that I had an intuitive understanding of REITs.

The Talmud was not talking about the cash flow of Johnson Creek Premium Outlets.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Why only 5-10% for REITs?

Post by LH » Fri Aug 09, 2013 10:39 am

nisiprius wrote:
LH wrote:I think Talmud one third land, one third business one third reserve still holds true today.

Nothing fundamentally has changed. I consider 1/3 as a reasonable upper bound of net worth in terms of land.
Let's not blur the basic nature of investments. A REIT mutual fund is not "land." It is an investment in the stock of corporations that operate commercial real estate. That's at least two steps removed; 1) stock ownership is not real estate ownership; 2) commercial real estate is not land.

It would be bad if I let my personal experience of buying a house led me to believe that I had an intuitive understanding of REITs.

The Talmud was not talking about the cash flow of Johnson Creek Premium Outlets.
This is the aspect which people either miss entirely, or just hold different view on.

Land, business, and cash reserves are fundamentally different.

Yes, there are stock exchanges, treasuries CDs for cash, etc etc etc. no the Talmud writers did not know of us treasuries.

But it's we're the fundamental income is derived from.

Business income comes from business activity.

Land income comes from land, rents or selling.

Cash is money held in reserve.

Now, when I buy horse and buggy whip company, it's not like buying land, bc horse and buggy whip can cease to exist, land, with some exceptions, Atlantis, Chernobyl, Detroit, can kinda be said to cease to exist.... But really not.

Nothing fundamentally has changed. It's why different legal structure, REIT law, differently metrics, FFO v PE, are present, it's not just for the heck of it.. Because land income, rent, is fundamentally different from business income.

One third land, one third business, one third reserve, is a simple diversification that still holds value today, in the modern form of reits, TSM, bonds.

It's the conflation of the wrapper with the fundamental underlying investment/source of income.

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Re: Why only 5-10% for REITs?

Post by abuss368 » Fri Aug 09, 2013 11:21 am

LH wrote:
nisiprius wrote:
LH wrote:I think Talmud one third land, one third business one third reserve still holds true today.

Nothing fundamentally has changed. I consider 1/3 as a reasonable upper bound of net worth in terms of land.
Let's not blur the basic nature of investments. A REIT mutual fund is not "land." It is an investment in the stock of corporations that operate commercial real estate. That's at least two steps removed; 1) stock ownership is not real estate ownership; 2) commercial real estate is not land.

It would be bad if I let my personal experience of buying a house led me to believe that I had an intuitive understanding of REITs.

The Talmud was not talking about the cash flow of Johnson Creek Premium Outlets.
This is the aspect which people either miss entirely, or just hold different view on.

Land, business, and cash reserves are fundamentally different.

Yes, there are stock exchanges, treasuries CDs for cash, etc etc etc. no the Talmud writers did not know of us treasuries.

But it's we're the fundamental income is derived from.

Business income comes from business activity.

Land income comes from land, rents or selling.

Cash is money held in reserve.

Now, when I buy horse and buggy whip company, it's not like buying land, bc horse and buggy whip can cease to exist, land, with some exceptions, Atlantis, Chernobyl, Detroit, can kinda be said to cease to exist.... But really not.

Nothing fundamentally has changed. It's why different legal structure, REIT law, differently metrics, FFO v PE, are present, it's not just for the heck of it.. Because land income, rent, is fundamentally different from business income.

One third land, one third business, one third reserve, is a simple diversification that still holds value today, in the modern form of reits, TSM, bonds.

It's the conflation of the wrapper with the fundamental underlying investment/source of income.
LH are you invested in International REITs / Real Estate or US only?

Do you also invest in Inflation bonds?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Why only 5-10% for REITs?

Post by avalpert » Fri Aug 09, 2013 11:30 am

LH wrote: Yes, there are stock exchanges, treasuries CDs for cash, etc etc etc. no the Talmud writers did not know of us treasuries.
CDs and Treasuries would not fit with what R. Yitchak was saying in the Talmud. It was specifically saying having one third of your wealth on hand ready for immediate use - even safe fixed income would not fit the bill.
I'm also not sure that equities would fit with the 1/3 in merchandise - I think one third in hard goods/durables may be the closer meaning.

If we are going to make appeals to authority we should at least faithfully represent what that authority was saying.

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Re: Why only 5-10% for REITs?

Post by tadamsmar » Fri Aug 09, 2013 11:53 am

InvestorNewb wrote:Hello,

Given that U.S. REITs have outperformed the S&P 500 for the last 40 years, why is it that people continue to recommend that they only account for 5-10% of your overall portfolio? Surely 40 years is a sufficiently long period to make rational investing decisions.

I know that some people will say "past performance doesn't equal future performance, blah blah". But let's be honest, we all look at past performance before investing.

There is an interesting chart that compares REITs to the S&P 500 index at:
http://www.havermannfinancial.com/hf_ne ... investors/

(The author says that after taxes, the returns to both asset classes are about equal.)

My point is that if you have the tax-advantaged space, why not max it out with REITs? Why only 5-10% given the supporting data?
You don't max out REITs because you want to do your best to optimize overall risk-adjusted return.

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Re: Why only 5-10% for REITs?

Post by LH » Fri Aug 09, 2013 4:01 pm

abuss368 wrote:
LH are you invested in International REITs / Real Estate or US only?

Do you also invest in Inflation bonds?
No, have held off on iREIT due to tax location mainly, as well as iREITs not well developed yet I think, even if it was as developed as say business stocks, the FTC loss holding it in tax sheltered is a pretty good hit I think? Also it's more complexity asset classes. Seems marginal at best, but something I may do in future. But in us REIT I don't get the foriegn tax loss , and holding foriegn us like reits in taxable is a big tax hit

I am 50/50 tips and I bonds to aggregate nominal index

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