How to achieve a 10% allocation in REITs

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jd990
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How to achieve a 10% allocation in REITs

Post by jd990 » Thu Jan 30, 2014 4:20 pm

I am 64, retired, and have my assets in the Thrift Savings Plan (TSP) and Vanguard non-retirement funds. I recently added the Vanguard REIT Index Fund (non-retirement) to my portfolio with the goal of having 10% of my assets allocated to the REIT fund. What would be the prudent way to attain the 10% target in real estate: (a) buy shares over five years till the target allocation is reached; or (b) roll over the money from TSP into a Vanguard REIT IRA?

MichDad
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Re: How to achieve a 10% allocation in REITs

Post by MichDad » Thu Jan 30, 2014 4:29 pm

I like the TSP too much to want to sell/transfer out of it to buy into non-TSP funds. So, between your two options, I'd go with option (b).

My situation is different from yours. I'm still working and contributing to the TSP and Roth IRAs. My wife is not a federal employee and she's investing a lot each year into Vanguard's REIT fund through her employer. We're slowly diversifying into REITs that way.

Good luck,

MichDad

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Re: How to achieve a 10% allocation in REITs

Post by placeholder » Thu Jan 30, 2014 6:12 pm

Assuming by "non-retirement" you mean taxable accounts then those are the proper place for REIT rather you should open Roth IRA accounts and put the REIT funds there.

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czeckers
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Re: How to achieve a 10% allocation in REITs

Post by czeckers » Thu Jan 30, 2014 6:18 pm

REIT valuations are not super cheap at this point so I would buy into them over 5 years. They definitely should be hald in a tax-deferred acount such as an IRA.

-K
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G-Money
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Re: How to achieve a 10% allocation in REITs

Post by G-Money » Thu Jan 30, 2014 6:28 pm

placeholder wrote:rather you should open Roth IRA accounts and put the REIT funds there.

I think that's the OP's dilemma. If the OP is retired, OP doesn't have any earned income, so new contributions to a Roth aren't possible. That leaves alternatives of (1) pulling money out of TSP and putting it into a rollover IRA or (2) investing in REITs in taxable.

To the OP,

I would not recommend putting REITs in taxable. All of the income thrown off from REITs is taxable at the ordinary income tax rate. The extra income could push you into the next tax bracket, could effect taxation of your social security benefits.

If you are sure you want REITs, I think you'd need to rollover a portion of your TSP. You'll pay more, but we're talking just a few basis points (0.10% for Admiral Shares of the Vanguard REIT fund, vs. around 0.02% for TSP). I don't know if you'll be able to roll that money back to TSP if you change your mind, so you may lose some asset protection (depending on your state), and you will pay higher expenses. But the tax cost of investing in REITs in taxable would be a far worse outcome, IMO.

But before you do anything, make sure to read this thread (started by Bill Bernstein, author of Four Pillars of Investing, Investors' Manifesto, and others): viewtopic.php?f=10&t=115965. It's market timing, but I like going into an investment with eyes wide open.
Don't assume I know what I'm talking about.

kerplunk
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Re: How to achieve a 10% allocation in REITs

Post by kerplunk » Thu Jan 30, 2014 6:35 pm

Why do you want 10% of your money in REITs, if you don't mind me asking? Just strikes me as odd at this point for you, considering you probably/hopefully have a large bond allocation... 10% would be a large portion of your "stock" allocation.

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Re: How to achieve a 10% allocation in REITs

Post by placeholder » Thu Jan 30, 2014 6:35 pm

Oh yeah I see.

jd990
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Re: How to achieve a 10% allocation in REITs

Post by jd990 » Thu Jan 30, 2014 8:01 pm

Kerplunk,
I’d like to add REITs as an asset class because it’s my understanding that it provides “powerful” diversification to portfolios, and it has a high correlation with inflation. (See Swensen’s “Fundamental Approach to Personal Investment” and Burton Malkiel’s “Random walk down Wall Street”). Malkiel, like G-Money, recommends putting REITs in a retirement account to minimize taxes.

kerplunk
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Re: How to achieve a 10% allocation in REITs

Post by kerplunk » Thu Jan 30, 2014 9:01 pm

jd990 wrote:Kerplunk,
I’d like to add REITs as an asset class because it’s my understanding that it provides “powerful” diversification to portfolios, and it has a high correlation with inflation. (See Swensen’s “Fundamental Approach to Personal Investment” and Burton Malkiel’s “Random walk down Wall Street”). Malkiel, like G-Money, recommends putting REITs in a retirement account to minimize taxes.

Interesting.

We all see things differently, but I believe the diversification benefits from REITs are negligible. I would be interested in taking a look at your entire portfolio.

Either way, REITs can be pretty volatile. Just something to think about.

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grabiner
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Re: How to achieve a 10% allocation in REITs

Post by grabiner » Thu Jan 30, 2014 9:17 pm

As much as I like REITs, I wouldn't recommend them in your situation. The high tax cost in a taxable account is likely to eliminate any diversification advantage. And if you don't have an IRA, using your one partial withdrawal from the TSP to create one isn't likely to be a good use of it. In addition, using the TSP gives you a great way to reduce risk, by increasing your G fund holdings or purchasing an annuity; both the G fund and the TSP annuity are better than the options available to the general public.
David Grabiner

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LH
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Re: How to achieve a 10% allocation in REITs

Post by LH » Thu Jan 30, 2014 9:25 pm

either lump sum it, which 2/3rds of the time is the winning way.

or DCA into it over a year.

Valuations are near meaningless. Its great for people to talk about and sound authoratative, oh valuations low now, valuations high, but one cannot do anything with it. Otherwise, active funds would work, and all you need to beat the stock market is to say, oh the moving average is high, sell/dont buy, oh the PE is low, buy, etc.

It does not work. It has no practical predictive meaning.

DetroitRed
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Re: How to achieve a 10% allocation in REITs

Post by DetroitRed » Fri Jan 31, 2014 11:01 am

Also, remember that the TSP stock funds hold REITs (though they hold market weightings which are less than 10%), so you already have assets in REITs.

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