20% In REITS?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
rattlenap
Posts: 324
Joined: Wed May 25, 2016 6:22 pm

20% In REITS?

Post by rattlenap » Sat Jul 23, 2016 11:37 pm

Is 20% of your stock portfolio to much to have in REITS? I am trying to figure out what the sweet spot/percentage is to allocate of your stock portion to REITS. This is if you solely hold the Vanguard Total U.S. Stock Market Index and no international.

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

Re: 20% In REITS?

Post by soboggled » Sat Jul 23, 2016 11:39 pm

About 0%. If you own a house you have more than enough in the real estate sector.

User avatar
nedsaid
Posts: 8052
Joined: Fri Nov 23, 2012 12:33 pm

Re: 20% In REITS?

Post by nedsaid » Sat Jul 23, 2016 11:42 pm

rattlenap wrote:Is 20% of your stock portfolio to much to have in REITS? I am trying to figure out what the sweet spot/percentage is to allocate of your stock portion to REITS. This is if you solely hold the Vanguard Total U.S. Stock Market Index and no international.


You are late to the party. REITs have done fantastic, in large part because of all the yield chasing. Larry Swedroe has calculated the future expected returns of REITs to be 0.3% after inflation. Bill Bernstein has issued similar warnings.

I have in recent months trimmed about 20% from my REITs. Not giving up on them but doing some prudent rebalancing. Take a look at International Real Estate. I sure would not rush into domestic REITs at this time.
A fool and his money are good for business.

mpsz
Posts: 148
Joined: Sat Jan 09, 2016 7:11 pm

Re: 20% In REITS?

Post by mpsz » Sat Jul 23, 2016 11:50 pm

Keep in mind that you already have some exposure to REITs through TSM. If you own your home, you should consider that as well.

REITs have done very well over the past 6 months, I agree that it may be a bit late to get in. I actually just entered trades for Monday to rebalance out of REITs. But... who knows what the future holds?

AlohaJoe
Posts: 2221
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: 20% In REITS?

Post by AlohaJoe » Sat Jul 23, 2016 11:56 pm

soboggled wrote:About 0%. If you own a house you have more than enough in the real estate sector.


If you have any kind of total stock market fund then you are over 4% REIT: http://portfolios.morningstar.com/fund/ ... ture=en_US

If you go for small caps, then it is probably even worse: Vanguard's Small Cap Index Fund is 15% REIT.

If you own any kind of total bond market fund then you have a 22% exposure to the real estate sector through that via the mortgage backed securities.

lack_ey
Posts: 5455
Joined: Wed Nov 19, 2014 11:55 pm

Re: 20% In REITS?

Post by lack_ey » Sun Jul 24, 2016 12:03 am

The standard advice would be to not try to change your allocation too much. What do you have now and why do you have that amount? Trying to play timing games based on valuations, recent performance, or other factors generally doesn't work too well and is prone to behavioral issues.

That said, running an analysis today, under conventional understandings of typical REIT returns based on yields, typical earnings growth, etc., the picture is not particularly pretty. If you want to overweight REITs, now doesn't particularly seem like a great time... or maybe not. It hasn't looked like a great time to be a REIT investor for the last few years but they just keep getting more and more expensive.

For what it's worth, Vanguard's simulation analysis from September 2015 (see yearly outlook) predicts about the following 10-year annualized returns, eyeballing the graphs on pages 19 and 24, all figures nominal:
US stock: 7.7% (between -3.2% and 19.4% with 90% confidence)
US REITs: 5.6% (between -2.5% and 14.7% with 90% confidence)
US bond: 2.5% (between 1.3% and 4.0% with 90% confidence)

Since September 2015, bond rates have fallen, the Fed hasn't raised the FFR as quickly as expected, and so on. US stocks are up 11%, US REITs up 29%, and US bonds up 6%. You can think of this as "stealing" some of the returns from the future. So revised estimates should probably be lower for all three to at least some extent, probably the most for REITs. Let's BS some numbers and pretend with some arbitrary adjustments that the expected returns are now more like 7.3%, 3.9%, and 2.1%. There are plenty of other analyses and projections out there if you have a different guess. To be honest, many predict lower returns for US stocks, but as the above confidence intervals and relative unpredictability of the markets attest to, it's not like the realized outcome is all that likely to look like anybody's best guess anyway (and we can't even agree on what the best guess might be).

You can plug in your own numbers here and check a hypothetical efficient frontier using historical relationships with the above expected returns (click the "efficient frontier" tab midway down the page):
https://www.portfoliovisualizer.com/eff ... &mean3=2.1

With the numbers I gave, you basically don't want to add any overweighting of REITs to a US stock and bond portfolio.

Of course all the above analysis is bunk but maybe somebody was mildly amused.

OutInThirteen
Posts: 381
Joined: Thu Mar 14, 2013 2:11 pm

Re: 20% In REITS?

Post by OutInThirteen » Sun Jul 24, 2016 12:26 am

My target REIT exposure (VGSNX) is 20% of my stock allocation.

Engineer250
Posts: 766
Joined: Wed Jun 22, 2016 1:41 pm

Re: 20% In REITS?

Post by Engineer250 » Sun Jul 24, 2016 1:57 am

nedsaid wrote:I have in recent months trimmed about 20% from my REITs. Not giving up on them but doing some prudent rebalancing. Take a look at International Real Estate. I sure would not rush into domestic REITs at this time.


Sounds like market timing :D
Where the tides of fortune take us, no man can know.

SleepKing
Posts: 223
Joined: Mon Mar 02, 2015 8:45 am

Re: 20% In REITS?

Post by SleepKing » Sun Jul 24, 2016 6:38 am

We have ~12% reit at present. Personally, 20% too much for me.

Id argue your home is not the only real estate investment you need in a diversified financial plan. Id also argue your home is not an investment, rather a consumer product. But thats just me.

Tune out the noise. Bonds are too high, stocks at all time high, reit overvalued, international doomed, etc. etc. etc.

Stick to your long term plan, ride the ups and downs. Reblanace. Keep working hard.

Best,
Sleepy

User avatar
InvestorNewb
Posts: 1564
Joined: Mon Sep 03, 2012 11:27 am

Re: 20% In REITS?

Post by InvestorNewb » Sun Jul 24, 2016 6:44 am

With the recent run up I am at almost exactly 20% REITs. I was already REIT heavy before, but now even more so.
I remember in 2012 when I first bought into them people were saying the same thing (i.e. now is not the the best time, they are probably overvalued, etc.) The whole point of stocks is to continuously hit new highs.

I do not plan on selling any of my shares/re-balancing out of them. I am quite happy seeing the dividends increase every quarter.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

Valuethinker
Posts: 32339
Joined: Fri May 11, 2007 11:07 am

Re: 20% In REITS?

Post by Valuethinker » Sun Jul 24, 2016 7:22 am

rattlenap wrote:Is 20% of your stock portfolio to much to have in REITS? I am trying to figure out what the sweet spot/percentage is to allocate of your stock portion to REITS. This is if you solely hold the Vanguard Total U.S. Stock Market Index and no international.


If you take a look at the 2008-09 chart of the VG REIT fund I believe you see a moment when the stock price had dropped -70%? Ie about 20% worse than the stock market as a whole?

I'd think carefully about how you would feel in that position. It is NOT a good argument that it subsequently recovered-- so did everything else, and that recovery was not guaranteed (think Japan 1990-now, down c. 65%).

Such a volatility in a sector that is only 2.5% of the VG TSM would make me cautious about a huge overweight.

I can make a case for 10% REITs (lower returns than stocks, but greater correlation with inflation in the long run). 15% even (but again volatility). 20%? You are taking a significant risk.

livesoft
Posts: 55514
Joined: Thu Mar 01, 2007 8:00 pm

Re: 20% In REITS?

Post by livesoft » Sun Jul 24, 2016 7:23 am

InvestorNewb wrote:With the recent run up I am at almost exactly 20% REITs. [...]

I do not plan on selling any of my shares/re-balancing out of them. I am quite happy seeing the dividends increase every quarter.

Sounds like market timing :D

BTW, I think REIT index funds are made for market timing. I don't think there is any "sweet spot" for the fraction of a separate REIT fund to hold in one's portfolio. My goal is not to extract the highest possible available return from a REIT fund. Instead my goal is to extract much of the return and avoid some of the major worst days in REIT funds. That is, I don't need perfect market timing to do fine. When I am not invested in REIT funds, then I use the money to invest in something else ... including bond funds and/or total stock market index funds.
This signature message sponsored by sscritic: Learn to fish.

User avatar
Index Fan
Posts: 2487
Joined: Wed Mar 07, 2007 12:13 pm
Location: The great Midwest

Re: 20% In REITS?

Post by Index Fan » Sun Jul 24, 2016 7:33 am

I'm a 'lumper' (owning Total Stock Market, Total International Stock, Total Bond, TIPS) that has a 10% REIT Index holding as a nod to the 'slice n' dice' strategy. I've done this for the past 15 years or so and it's worked out well for diversification (future results may be different yadda yadda).
"Optimum est pati quod emendare non possis." | -Seneca

Valuethinker
Posts: 32339
Joined: Fri May 11, 2007 11:07 am

Re: 20% In REITS?

Post by Valuethinker » Sun Jul 24, 2016 8:21 am

Index Fan wrote:I'm a 'lumper' (owning Total Stock Market, Total International Stock, Total Bond, TIPS) that has a 10% REIT Index holding as a nod to the 'slice n' dice' strategy. I've done this for the past 15 years or so and it's worked out well for diversification (future results may be different yadda yadda).


10% you are not betting the ranch, either way.

Over say a 30-40 year view, it's likely the total wealth in a portfolio which is 10% REITs vs. 0% REITs (and otherwise the same) will be pretty similar.

As long as no one treats REITs as part of their bonds allocation, but as an equity (which it is).

User avatar
ruralavalon
Posts: 10939
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 20% In REITS?

Post by ruralavalon » Sun Jul 24, 2016 8:31 am

We hold Vanguard REIT Index Fund at 5% of portfolio, 10% of stocks, about 13% of domestic stocks.

On Friday I sold some REIT to bring us back down to our 5% target allocation.
Last edited by ruralavalon on Sun Jul 24, 2016 11:04 am, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

dbr
Posts: 22539
Joined: Sun Mar 04, 2007 9:50 am

Re: 20% In REITS?

Post by dbr » Sun Jul 24, 2016 8:35 am

I think the sweet spot is zero additional to TSM. That doesn't mean it is a mistake to add some concentration in REITs but I don't think there is a huge benefit to do so. 20% of the whole portfolio would be pretty extreme. One would ask what suggests this option right now? I don't think messing around with total market portfolios without already having a very good idea why is at all recommended.

tomd37
Posts: 2573
Joined: Thu Mar 01, 2007 10:39 pm
Location: Middle Tennessee

Re: 20% In REITS?

Post by tomd37 » Sun Jul 24, 2016 8:55 am

Maybe I am misinterpreting some of the previous comments, but I wish people would clearly state in their comments whether they are expressing the percentage of REITS as a percentage of the stock portion of their portfolio or as a percentage of their total portfolio. :?
Tom D.

User avatar
nedsaid
Posts: 8052
Joined: Fri Nov 23, 2012 12:33 pm

Re: 20% In REITS?

Post by nedsaid » Sun Jul 24, 2016 10:40 am

Engineer250 wrote:
nedsaid wrote:I have in recent months trimmed about 20% from my REITs. Not giving up on them but doing some prudent rebalancing. Take a look at International Real Estate. I sure would not rush into domestic REITs at this time.


Sounds like market timing :D


No, just rebalancing.
A fool and his money are good for business.

User avatar
nedsaid
Posts: 8052
Joined: Fri Nov 23, 2012 12:33 pm

Re: 20% In REITS?

Post by nedsaid » Sun Jul 24, 2016 10:50 am

InvestorNewb wrote:With the recent run up I am at almost exactly 20% REITs. I was already REIT heavy before, but now even more so.
I remember in 2012 when I first bought into them people were saying the same thing (i.e. now is not the the best time, they are probably overvalued, etc.) The whole point of stocks is to continuously hit new highs.

I do not plan on selling any of my shares/re-balancing out of them. I am quite happy seeing the dividends increase every quarter.


Valuations are important. Asset allocation is important. Controlling risk is important. I have been mildly rebalancing my portfolio since July of 2013, so I have been at it for three years now. Slowly selling stocks to buy bonds. I have been trimming REITs and putting the proceeds into bonds, international stocks, and mid-caps.

Yes, the point of owning anything is to continuously hit new highs but there gets to be a point of where you need to control risk in a portfolio. Both stocks and REITs have been hitting highs and I have been trimming.

I used to be very relaxed on the subject of rebalancing as I had many years until retirement. But I recently turned 57 years old, retirement looks closer and closer, and controlling the risk in my portfolio looks more and more important.

I love stocks and I love REITs but at some point you can suffer from too much love. I don't want my portfolio to become riskier and riskier. I remember the V-8 moment I had when the 2008-2009 financial crisis and bear market hit, I had missed a terrific rebalancing opportunity in 2007 and I was regretting it. I swore that I wouldn't let that happen again.
A fool and his money are good for business.

reneeh63
Posts: 233
Joined: Wed Dec 17, 2014 7:12 pm

Re: 20% In REITS?

Post by reneeh63 » Sun Jul 24, 2016 10:51 am

tomd37 wrote:Maybe I am misinterpreting some of the previous comments, but I wish people would clearly state in their comments whether they are expressing the percentage of REITS as a percentage of the stock portion of their portfolio or as a percentage of their total portfolio. :?


13% of my total portfolio...which is about 25% bonds overall.

Nowizard
Posts: 1147
Joined: Tue Oct 23, 2007 5:33 pm

Re: 20% In REITS?

Post by Nowizard » Sun Jul 24, 2016 1:03 pm

Many recommend REITS for larger portfolios and state that they are best in tax deferred accounts due to annual taxes they generate from distributions. We do own REITS in addition to the ones owned in index funds, so we do overweight the market in that sense. As others have commented, it would be difficult to argue against a large percentage of REITS in a recent portfolio, but that does not say what will happen in the future. Over 12% annually for the past five years for the Vanguard REIT Index. Bogleheads would almost all recommend rebalancing over new, "momentum investing" at this time, calling the latter inconsistent with the Boglehead philosophy.

Tim

User avatar
TxAg
Posts: 1031
Joined: Sat Oct 17, 2009 11:09 am

Re: 20% In REITS?

Post by TxAg » Sun Jul 24, 2016 2:15 pm

tomd37 wrote:Maybe I am misinterpreting some of the previous comments, but I wish people would clearly state in their comments whether they are expressing the percentage of REITS as a percentage of the stock portion of their portfolio or as a percentage of their total portfolio. :?



For us, as of today, about 10% of total portfolio, which happens to be 10% of equities as well


edit..
Last edited by TxAg on Sun Jul 24, 2016 4:18 pm, edited 1 time in total.

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: 20% In REITS?

Post by Erwin » Sun Jul 24, 2016 3:04 pm

David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.
Erwin

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

Re: 20% In REITS?

Post by soboggled » Sun Jul 24, 2016 3:23 pm

Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.

He also recommends 30% US equities, 20% foreign equities, 15% Treasuries and 15% TIPS. What do you think of that?
I don't like it very much. And I really really don't like "one-size fits all" AA recommendations. I think he may be better at institutional investing than individual investing, and I suspect it doesn't take much to be a successful investor for Yale with all its available resources and opportunities.

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: 20% In REITS?

Post by Erwin » Sun Jul 24, 2016 3:43 pm

soboggled wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.

He also recommends 30% US equities, 20% foreign equities, 15% Treasuries and 15% TIPS. What do you think of that?
I don't like it very much. And I really really don't like "one-size fits all" AA recommendations. I think he may be better at institutional investing than individual investing, and I suspect it doesn't take much to be a successful investor for Yale with all its available resources and opportunities.


If you look a little bit deeper you may reconsider and not jump so quickly to any concussions. His recommendation has been a good friend of many. If I recall, since the mid 1970s his portfolio has returned about 10% annually with a volatile of about 10%. If you read his book, much liked by many, he goes into great detail to explain his logic. I think we may all have much to learn from Swensen, one of the greatest investors.
Erwin

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

Re: 20% In REITS?

Post by soboggled » Sun Jul 24, 2016 3:46 pm

Erwin wrote:
soboggled wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.

He also recommends 30% US equities, 20% foreign equities, 15% Treasuries and 15% TIPS. What do you think of that?
I don't like it very much. And I really really don't like "one-size fits all" AA recommendations. I think he may be better at institutional investing than individual investing, and I suspect it doesn't take much to be a successful investor for Yale with all its available resources and opportunities.


If you look a little bit deeper you may reconsider and not jump so quickly to any concussions. His recommendation has been a good friend of many. If I recall, since the mid 1970s his portfolio has returned about 10% annually with a volatile of about 10%. If you read his book, much liked by many, he goes into great detail to explain his logic. I think we may all have much to learn from Swensen, one of the greatest investors.

Maybe I lack the context. But suggesting an investor should have the same % in REITS, whether or not for example he owns a house or other real estate, and should be 70/30 equities regardless of his risk tolerance, age and other sources of income seems very problematic to me.
Also, Swensen has access to certain investments the individual does not, so his record and recommendations for individuals I take with some grain of salt. He built his rep by getting Yale out of just the old boring investments like bonds - good for him, but not exactly an act of genius.

MichaelLewis
Posts: 8
Joined: Fri Jul 22, 2016 8:33 am
Location: Miami, FL & Lexington, VA

Re: 20% In REITS?

Post by MichaelLewis » Sun Jul 24, 2016 5:00 pm

soboggled: I rate Swensen's book to be one of the best investment books. To claim "He built his rep by getting Yale out of just the old boring investments like bonds - good for him, but not exactly an act of genius." is not factual. It misses the point that the Yale endowment has beat ALL other endowment returns for many years. I am not sure about genius, but he is the best at what he does. His book was written in everyday language and fully backed up with research and facts. Personally, I am following his advice, especially his love of Vanguard funds. Don't put the man down. Read his book as I think you will like it. Please don't take this as a personal attack as I am not against you; you make valid points in your posts. I just think you missed the mark with your Swensen comments.

Swensen states asset allocation is a suggested starting point. He clearly states that as you approach retirement and/or wish to reduce volatility then you should increase your bond allocation.

BTW, to clarify what someone posted earlier, your personal residence is not a financial asset and should not be counted in your allocation. I guess it could be similar to the thought of since I own a car I should not own stock in automotive companies. If you own rental property, then maybe include that in your allocation.

The OP subsequently stated that he has profits in TCM and REITs and is rebalancing. He also stated that he wants to reduce risk. I think he answered his own question -- reduce allocations to equities and real assets and increase fixed assets. If he is currently at 20% REIT, then reduce accordingly. Not timing market, but adjusting his risk as he ages (hopefully per his IPS).
Last edited by MichaelLewis on Sun Jul 24, 2016 5:24 pm, edited 1 time in total.
Mike Lewis | "Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!" (MT 25:23)

Engineer250
Posts: 766
Joined: Wed Jun 22, 2016 1:41 pm

Re: 20% In REITS?

Post by Engineer250 » Sun Jul 24, 2016 5:10 pm

mpsz wrote:Keep in mind that you already have some exposure to REITs through TSM. If you own your home, you should consider that as well.

REITs have done very well over the past 6 months, I agree that it may be a bit late to get in. I actually just entered trades for Monday to rebalance out of REITs. But... who knows what the future holds?


I agree with all that, but don't like the idea that anyone that owns their own house shouldn't get into REITs even if it matches their personal investment strategy. I feel like having equity in your house is like owning stock in one asset (your house, the local real estate market). A diversified REIT fund is a lot different, a lot more split up between residential and commercial.

I know a lot of business owners prefer to put excess money into real estate at various times. I don't think over tilting to real estate is that catastrophically risky, especially in something like Vanguard REIT (150 different stocks). Also it does seem one of the few things that has a low correlation to total stock market.

I'm currently 0.5% REIT of total portfolio. I was trying to work my way up to 10% (I am 100% equities, so that is 10% total and 10% of equities). Not sure if I will continue on plan or just go total stock market for now. I have a rollover showing up in a month that I will need to make the decision on then. I think everyone saying it's too late or not to get in now are pretty much suggestion some measure of market timing. But it is hard to do something we feel like is "buying high".
Where the tides of fortune take us, no man can know.

User avatar
nedsaid
Posts: 8052
Joined: Fri Nov 23, 2012 12:33 pm

Re: 20% In REITS?

Post by nedsaid » Sun Jul 24, 2016 6:19 pm

Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.


A lot has changed since his book came out in 2005. What does he recommend now?
A fool and his money are good for business.

lack_ey
Posts: 5455
Joined: Wed Nov 19, 2014 11:55 pm

Re: 20% In REITS?

Post by lack_ey » Sun Jul 24, 2016 6:25 pm

nedsaid wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.


A lot has changed since his book came out in 2005. What does he recommend now?

Dunno but as said many times before, as of about 2009 or so he suggested a change: 20% REIT, 5% emerging markets -> 15% REIT, 10% emerging markets. This is reflected in the wiki. So the 20% is not current.

User avatar
nedsaid
Posts: 8052
Joined: Fri Nov 23, 2012 12:33 pm

Re: 20% In REITS?

Post by nedsaid » Sun Jul 24, 2016 6:41 pm

lack_ey wrote:
nedsaid wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.


A lot has changed since his book came out in 2005. What does he recommend now?

Dunno but as said many times before, as of about 2009 or so he suggested a change: 20% REIT, 5% emerging markets -> 15% REIT, 10% emerging markets. This is reflected in the wiki. So the 20% is not current.


Maybe Swenson hasn't gotten the memo from Larry Swedroe and Dr. Bill Bernstein. 15% is still a lot.
A fool and his money are good for business.

User avatar
Bogle_Feet
Posts: 826
Joined: Tue Jan 14, 2014 6:56 pm

Re: 20% In REITS?

Post by Bogle_Feet » Sun Jul 24, 2016 6:42 pm

You are late to the party.

I agree. Avoid REITS.

Also ask yourself if you think interest rates may go up in the near future. When that happens REITS will suffer.

Back to the original question. The most I've ever seen recommended to put in REITS was about 4%. This was Ric Edelman's portfolio selector that spits out allocations. But others like Burton Malkiel say to put NOTHING in REITS. https://blog.wealthfront.com/tax-effici ... investing/

User avatar
InvestorNewb
Posts: 1564
Joined: Mon Sep 03, 2012 11:27 am

Re: 20% In REITS?

Post by InvestorNewb » Sun Jul 24, 2016 6:44 pm

Engineer250 wrote:I'm currently 0.5% REIT of total portfolio.

I assume that is a typo? What is the point of having 0.5% of anything?
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

Engineer250
Posts: 766
Joined: Wed Jun 22, 2016 1:41 pm

Re: 20% In REITS?

Post by Engineer250 » Sun Jul 24, 2016 7:33 pm

InvestorNewb wrote:
Engineer250 wrote:I'm currently 0.5% REIT of total portfolio.

I assume that is a typo? What is the point of having 0.5% of anything?


Not a typo. Agree 0.5% is nearly pointless. I was trying to build up to 10% with contributions and a rollover that's in process (and so invested nowhere right now).
Where the tides of fortune take us, no man can know.

Ganacel
Posts: 194
Joined: Tue Sep 02, 2014 3:23 pm

Re: 20% In REITS?

Post by Ganacel » Sun Jul 24, 2016 11:28 pm

I don't think there's a "right" answer to this question that applies to everyone any more than there is one single "best" AA that applies to everyone. You have to think about your goals and your degree of risk aversion, and then do what makes sense to you. Plenty of people retire with basically their home being their only asset, so kind of like having 100% invested in real estate (and in one single building). If that doesn't seem "risky" and like putting all of your eggs in one basket, I don't know what is. But lots of people still do it. So when you think about it that way, "only" putting 20% in a REIT fund doesn't seem so severe (and it's a lot more liquid than buying a house).

In my case, I don't own a home. So yeah, I do some tilting toward REITs (though not as much as you, more in the 4-5% range on top of what I have in my total market and small cap funds). Is that the "right" amount? Who knows? Lately that fund has been performing really well, so, naturally, I'm feeling positive toward it. But if it gets above 5% of my AA, I'll start selling some of it to rebalance.

expat
Posts: 732
Joined: Mon Mar 10, 2008 9:07 pm

Re: 20% In REITS?

Post by expat » Wed Jul 27, 2016 8:53 pm

FWIW. my ISP says I should be at 16 percent but I am actually at 17 percent.

soboggled
Posts: 901
Joined: Mon Jun 27, 2016 10:26 am

Re: 20% In REITS?

Post by soboggled » Wed Jul 27, 2016 9:07 pm

MichaelLewis wrote:soboggled: I rate Swensen's book to be one of the best investment books. To claim "He built his rep by getting Yale out of just the old boring investments like bonds - good for him, but not exactly an act of genius." is not factual. It misses the point that the Yale endowment has beat ALL other endowment returns for many years. I am not sure about genius, but he is the best at what he does. His book was written in everyday language and fully backed up with research and facts. Personally, I am following his advice, especially his love of Vanguard funds. Don't put the man down. Read his book as I think you will like it. Please don't take this as a personal attack as I am not against you; you make valid points in your posts. I just think you missed the mark with your Swensen comments.

Swensen states asset allocation is a suggested starting point. He clearly states that as you approach retirement and/or wish to reduce volatility then you should increase your bond allocation.

BTW, to clarify what someone posted earlier, your personal residence is not a financial asset and should not be counted in your allocation. I guess it could be similar to the thought of since I own a car I should not own stock in automotive companies. If you own rental property, then maybe include that in your allocation.

The OP subsequently stated that he has profits in TCM and REITs and is rebalancing. He also stated that he wants to reduce risk. I think he answered his own question -- reduce allocations to equities and real assets and increase fixed assets. If he is currently at 20% REIT, then reduce accordingly. Not timing market, but adjusting his risk as he ages (hopefully per his IPS).

Ludicrous playing with words. A job with a company is not a financial asset either, but it is a mistake to double down by buying its stock. Nor should you invest in a car dealership and then go buy stock in car companies. The point is not putting your eggs in one basket, all silly sophistry aside.

young-ish
Posts: 35
Joined: Fri Apr 15, 2016 12:10 am

Re: 20% In REITS?

Post by young-ish » Wed Jul 27, 2016 10:22 pm

Bogle_Feet wrote:
You are late to the party.

I agree. Avoid REITS.

Back to the original question. The most I've ever seen recommended to put in REITS was about 4%. This was Ric Edelman's portfolio selector that spits out allocations. But others like Burton Malkiel say to put NOTHING in REITS. https://blog.wealthfront.com/tax-effici ... investing/


That's weird. From my memory, in the most recent edition (2014/15?) of Random Walk Down Wall Street Burton Malkiel recommended 15% of the total portfolio in REITS. My recollection was that he proposed that allocation for current retirees.

I think it was lower for younger folks. Anyone have the book available?

User avatar
in_reality
Posts: 4105
Joined: Fri Jul 12, 2013 6:13 am

Re: 20% In REITS?

Post by in_reality » Wed Jul 27, 2016 11:39 pm

10.34% of equities

VT (Vanguard Total World Stock) holds 4.28%, so I am right in line with my allocation of:

+3% US REITS
+3% International REITS

You can see International REITS haven't had the big run up as US ones have recently

http://quotes.morningstar.com/chart/etf ... 2%3A955%7D

If you don't have any international allocation, maybe you could use international REITS for that. Just a thought ... there might be some differences for what qualifies in the holdings (i.e. international probably has more real estate development projects which are more speculative) though.
[60% US _ 26% DEV _ 14% EM] | (-16% LC _ +8% MC _ +8% SC) | [47% FND/VAL _ 40% MKT _ 7% MOM _ 6% REIT] | (+/- 5% or *25% rebalancing bands)

User avatar
abuss368
Posts: 11396
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: 20% In REITS?

Post by abuss368 » Wed Jul 27, 2016 11:56 pm

nedsaid wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.


A lot has changed since his book came out in 2005. What does he recommend now?


I was very fortunate to attend a lecture of David Swensen a few years ago after to so called update portfolio change. Strangely he recommended the original investment portfolio as noted in "Unconventional Success". I learned much from his lecture.
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

User avatar
abuss368
Posts: 11396
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: 20% In REITS?

Post by abuss368 » Thu Jul 28, 2016 12:01 am

We have been very long time REIT investors. First with individual stocks and now Vanguard index funds. We allocate approximately 30% of equity to REITs and this has worked very well. U.S. REITs Index is 18% of equity and International REITs is 12% of equity.
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

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: 20% In REITS?

Post by Erwin » Thu Jul 28, 2016 12:19 am

abuss368 wrote:
nedsaid wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.


A lot has changed since his book came out in 2005. What does he recommend now?


I was very fortunate to attend a lecture of David Swensen a few years ago after to so called update portfolio change. Strangely he recommended the original investment portfolio as noted in "Unconventional Success". I learned much from his lecture.


The question is whether Swensen's recommendation is on the total allocation of REITs including whatever REITs may be in the other stock funds that one may own, or it is in addition? I follow Swensen's equity allocation but do not have 20% in a REITs fund, rather 20% total, meaning I include the contribution of my other funds.
Which one is correct?
Erwin

User avatar
abuss368
Posts: 11396
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: 20% In REITS?

Post by abuss368 » Thu Jul 28, 2016 5:14 am

Erwin wrote:
abuss368 wrote:
nedsaid wrote:
Erwin wrote:David Swensen, the very successful Chief Investment Officer at Yale University, in his classical "Unconventional Success" recommends a portfolio that holds 20% REIT.


A lot has changed since his book came out in 2005. What does he recommend now?


I was very fortunate to attend a lecture of David Swensen a few years ago after to so called update portfolio change. Strangely he recommended the original investment portfolio as noted in "Unconventional Success". I learned much from his lecture.


The question is whether Swensen's recommendation is on the total allocation of REITs including whatever REITs may be in the other stock funds that one may own, or it is in addition? I follow Swensen's equity allocation but do not have 20% in a REITs fund, rather 20% total, meaning I include the contribution of my other funds.
Which one is correct?


That never came up or was discussed in terms of possible fund overlap.
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

TheGipper
Posts: 263
Joined: Fri Jun 26, 2015 9:52 am

Re: 20% In REITS?

Post by TheGipper » Thu Jul 28, 2016 7:44 am

Check out the excellent site portfoliocharts.com and go to their portfolio finder calculator. It lets you enter your desired minimum 15 year real CAGR and it gives you the optimal portfolio of 4-5 equally weighted asset classes that achieves this return (as calculated by looking at each start date starting at 1972) with the lowest worst year result.

The results are illuminating. For example if one is shooting for higher long term returns, favored asset classes in addition to total stock market include small cap value, microcaps, international small cap, long term treasuries, and REITs in significant amounts. This makes intuitive sense if you think about it, diversifying as much as possible among higher risk asset classes with lower correlation. The long term treasuries will surprise some, but probably consistently does well by providing a deflation hedge.

You can then take this as a starting point and fine tune your portfolio with the other calculators, particularly the withdrawal rate calculators, and you will find that further diversification with gold, commodities, emerging markets, and further diversifying your bond holdings can cause significant increases in the sustainable withdrawal rate of your portfolio.

Playing around with this for a while, you can see also how a 70/30 or even 60/40 porfolio that is highly diversified can have an equal or better sustainale withdrawal rate to a 100% equity portfolio without giving up much average return.

Has influenced me already to consider increasing my REIT (15%), microcap/scv (20%), and international small cap (10%) holdings as well as to add long term treasuries to my FI holdings. In the end, it probably matters little which actual asset classes you choose, but that you choose several poorly correlated assets in significant amounts and stick with it long term with rebalancing. I already like REITs, SCV, SC, and int-SC so that will be easier for me to stick with. The bond recommendations will be a harder sell for me. I still like an intermediate bond index in accumulation phase and a mix of long/intermediate bond index, short term treasuries, and TIPS in withdrawal phase.
Last edited by TheGipper on Thu Jul 28, 2016 7:54 am, edited 1 time in total.

User avatar
telemark
Posts: 1960
Joined: Sat Aug 11, 2012 6:35 am

Re: 20% In REITS?

Post by telemark » Thu Jul 28, 2016 7:49 am

In the book Unconventional Success Swensen observes that
Any number of portfolio allocations satisfy the mathematical and functional requirements diversification and equity orientation.
and offers a reference portfolio as one example of how such a portfolio might be constructed. He then adds
Personal preferences, circumstances, and abilitites affect portfolio construction in a profound manner.
The reference portfolio shouldn't be taken as a one-size-fits-all but as a possible starting point for a more individual allocation. I recommend studying the book. The writing style is heavily academic, but there's a lot of thought and experience there.

User avatar
telemark
Posts: 1960
Joined: Sat Aug 11, 2012 6:35 am

Re: 20% In REITS?

Post by telemark » Thu Jul 28, 2016 7:54 am

soboggled wrote:A job with a company is not a financial asset either, but it is a mistake to double down by buying its stock.

True, but neither would I then avoid stocks altogether on the grounds that I already work in the economy. The main risk in owning a home is ideosyncratic--location, location, and location. A REIT index diversifies that risk and also includes commercial real estate. Now if anyone here owns a shopping mall or two, that's probably a reason to avoid more real estate investments.

need403bhelp
Posts: 309
Joined: Thu May 28, 2015 6:25 pm

Re: 20% In REITS?

Post by need403bhelp » Thu Aug 10, 2017 4:33 pm

Bogle_Feet wrote:
You are late to the party.
I agree. Avoid REITS.

Also ask yourself if you think interest rates may go up in the near future. When that happens REITS will suffer.

Back to the original question. The most I've ever seen recommended to put in REITS was about 4%. This was Ric Edelman's portfolio selector that spits out allocations. But others like Burton Malkiel say to put NOTHING in REITS. https://blog.wealthfront.com/tax-effici ... investing/
FYI, your link talks about Burton Malkiel excluding REITs from TAXABLE accounts due to their TAX INEFFICIENCY.

In A Random Walk Down Wall Street 11th edition (2014), Chapter 12 "A FITNESS MANUAL FOR RANDOM WALKERS AND OTHER INVESTORS," "EXERCISE 5: MAKE SURE THE SHOE FITS: UNDERSTAND YOUR INVESTMENT OBJECTIVES," he states (bold added for emphasis):

"Commercial real estate has been an unattainable investment for many individuals. Nevertheless, the returns from real estate have been quite generous, similar to those from common stocks. I’ll argue in Exercise 6 that individuals who can afford to buy their own homes are well advised to do so. I’ll also show that it is much easier today for individuals to invest in commercial real estate. I believe that real estate investment trusts (REITs) deserve a position in a well-diversified investment portfolio."

Additionally, in "EXERCISE 6: BEGIN YOUR WALK AT YOUR OWN HOME—RENTING LEADS TO FLABBY INVESTMENT MUSCLES":

"You may also wish to consider ownership of commercial real estate through the medium of real estate investment trusts (REITs, pronounced “reets”). Properties from apartment houses to office buildings and shopping malls have been packaged into REIT portfolios and managed by professional real estate operators. The REITs themselves are like any other common stock and are actively traded on the major stock exchanges. This has afforded an excellent opportunity for individuals to add commercial real estate to their investment portfolios.

If you want to move your portfolio toward terra firma, I strongly suggest you invest some of your assets in REITs. There are many reasons why they should play a role in your investment program. First, ownership of real estate has produced comparable rates of return to common stocks and good dividend yields. Equally important, real estate is an excellent vehicle to provide the benefits of diversification described in chapter 8. Real estate returns have often exhibited only a moderate correlation with other assets, thereby reducing the overall risk of an investment program. Moreover, real estate has been a dependable hedge against inflation.

Unfortunately, the job of sifting through the hundreds of outstanding REITs is a daunting one. Moreover, a single-equity REIT is unlikely to provide the necessary diversification across property types and regions. Individuals could stumble badly by purchasing the wrong REIT. Now, however, investors have a rapidly expanding group of real estate mutual funds that are more than willing to do the job for them. The funds cull through the available offerings and put together a diversified portfolio of REITs, ensuring that a wide variety of property types and regions are represented. Moreover, investors have the ability to liquidate their fund holdings whenever they wish. There are also low expense REIT index funds (listed in the Address Book), and I believe these funds will continue to produce the best net returns for investors."

Finally, on pages 368-69, part of "THE LIFE-CYCLE INVESTMENT GUIDE" in Chapter 14 "A LIFE-CYCLE GUIDE TO INVESTING," include a 10-15% REIT allocation (% of total portfolio, not % of equities) depending on one's age (10% for younger investors and 15% for older investors):

Image

Image

Image

Image
Last edited by need403bhelp on Thu Aug 10, 2017 4:39 pm, edited 1 time in total.

MrNewEngland
Posts: 591
Joined: Sun Sep 28, 2014 11:38 am

Re: 20% In REITS?

Post by MrNewEngland » Thu Aug 10, 2017 4:38 pm

mpsz wrote:Keep in mind that you already have some exposure to REITs through TSM.
I didn't realize that this was the case. VTI has some of the same holdings as VNQ? I thought they were mutually exclusive.

staythecourse
Posts: 4700
Joined: Mon Jan 03, 2011 9:40 am

Re: 20% In REITS?

Post by staythecourse » Thu Aug 10, 2017 4:42 pm

nedsaid wrote:
rattlenap wrote:Is 20% of your stock portfolio to much to have in REITS? I am trying to figure out what the sweet spot/percentage is to allocate of your stock portion to REITS. This is if you solely hold the Vanguard Total U.S. Stock Market Index and no international.
You are late to the party. REITs have done fantastic, in large part because of all the yield chasing. Larry Swedroe has calculated the future expected returns of REITs to be 0.3% after inflation. Bill Bernstein has issued similar warnings.

I have in recent months trimmed about 20% from my REITs. Not giving up on them but doing some prudent rebalancing. Take a look at International Real Estate. I sure would not rush into domestic REITs at this time.
Just curious what the data is supporting the prognostic abilities of Mr. Swedroe OR Dr. Bernstein? Do they have a track record of making calls and being right? If so, then how do we know it is luck and not skill?

I would think unless there is STRONG evidence that supports their correct ability to make calls then their advice is no different then mine or the psychic down the street.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
nedsaid
Posts: 8052
Joined: Fri Nov 23, 2012 12:33 pm

Re: 20% In REITS?

Post by nedsaid » Thu Aug 10, 2017 5:51 pm

staythecourse wrote:
nedsaid wrote:
rattlenap wrote:Is 20% of your stock portfolio to much to have in REITS? I am trying to figure out what the sweet spot/percentage is to allocate of your stock portion to REITS. This is if you solely hold the Vanguard Total U.S. Stock Market Index and no international.
You are late to the party. REITs have done fantastic, in large part because of all the yield chasing. Larry Swedroe has calculated the future expected returns of REITs to be 0.3% after inflation. Bill Bernstein has issued similar warnings.

I have in recent months trimmed about 20% from my REITs. Not giving up on them but doing some prudent rebalancing. Take a look at International Real Estate. I sure would not rush into domestic REITs at this time.
Just curious what the data is supporting the prognostic abilities of Mr. Swedroe OR Dr. Bernstein? Do they have a track record of making calls and being right? If so, then how do we know it is luck and not skill?

I would think unless there is STRONG evidence that supports their correct ability to make calls then their advice is no different then mine or the psychic down the street.

Good luck.
It is not that I am attributing infallibility to Swedroe or Bernstein. What I am saying is that valuations matter. REITs historically yielded 6%-8% and now the yield is a bit over 3%. That should tell you something. What we do know from history is that cheap beats expensive. Pretty much it is an attempt to avoid performance chasing. Since the 2008-2009 financial crisis, investors have chased yield like crazy. Do you suggest that we chase yields even harder? I have read here is that some Bogleheads have cashed out their REIT position. What I did was to cut back on my REIT allocation by 20% and then buy no more. It is similar to my comments about the low volatility stocks and particularly consumer staples stocks which are quite expensive. Pretty much, I am saying stop piling into these things. Chasing hot performance often ends in tears.
A fool and his money are good for business.

Post Reply