Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

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msterrr
Posts: 26
Joined: Wed Sep 20, 2017 6:28 am

Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Sat Oct 07, 2017 9:16 pm

alex_686 wrote:
Thu Oct 05, 2017 8:12 am
I am working off of memory here. If REITs offer a slightly lower return and slightly lower volatility than the S&P 500 and if the correlation is about .7 then the optional holdings is somewhere between 10% to 20%. A note on mean variance portfolio optimization - it is very sensitive to inputs. Change them slightly and you get wildly different results. I will say that a 20% REIT allocation gets you to 9% under your scenario, so 10% would be at my upper limit for my reallocation bands.
Under your MVO scenario would exposure to MBS through a bond fund result in a lower ideal REIT allocation? VBMFX for example is ~20% MBS.

alex_686
Posts: 4045
Joined: Mon Feb 09, 2015 2:39 pm

Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by alex_686 » Sun Oct 08, 2017 12:45 pm

msterrr wrote:
Sat Oct 07, 2017 9:16 pm
alex_686 wrote:
Thu Oct 05, 2017 8:12 am
I am working off of memory here. If REITs offer a slightly lower return and slightly lower volatility than the S&P 500 and if the correlation is about .7 then the optional holdings is somewhere between 10% to 20%. A note on mean variance portfolio optimization - it is very sensitive to inputs. Change them slightly and you get wildly different results. I will say that a 20% REIT allocation gets you to 9% under your scenario, so 10% would be at my upper limit for my reallocation bands.
Under your MVO scenario would exposure to MBS through a bond fund result in a lower ideal REIT allocation? VBMFX for example is ~20% MBS.
To me this is a very random question. What am I missing?

REITs are a type of equity. A very special type of equity. Tax laws give REITs a unique and distinct character. It is a proxy to a underrepresented classes of assets - direct holdings of real estate. There are casual relationships which govern the correlation.

MBS are bonds. They lie on a different dimension. Sure, they are bonds on real estate. But the factors here are interest rates and personal credit. What is the causal relationship that you see between stocks and MBS? Sure, we have things like 2008 where the real estate market melt down is so bad it spills over to the rest of the economy. Here we see a relationship between MBS, REITs and stocks. But this is kind of the exception to the rule.

REITs, as equities, have unlimited upside. MBS, as bonds, have much lower returns and risks,.

msterrr
Posts: 26
Joined: Wed Sep 20, 2017 6:28 am

Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Mon Oct 09, 2017 5:50 am

alex_686 wrote:
Sun Oct 08, 2017 12:45 pm
msterrr wrote:
Sat Oct 07, 2017 9:16 pm
alex_686 wrote:
Thu Oct 05, 2017 8:12 am
I am working off of memory here. If REITs offer a slightly lower return and slightly lower volatility than the S&P 500 and if the correlation is about .7 then the optional holdings is somewhere between 10% to 20%. A note on mean variance portfolio optimization - it is very sensitive to inputs. Change them slightly and you get wildly different results. I will say that a 20% REIT allocation gets you to 9% under your scenario, so 10% would be at my upper limit for my reallocation bands.
Under your MVO scenario would exposure to MBS through a bond fund result in a lower ideal REIT allocation? VBMFX for example is ~20% MBS.
To me this is a very random question. What am I missing?

REITs are a type of equity. A very special type of equity. Tax laws give REITs a unique and distinct character. It is a proxy to a underrepresented classes of assets - direct holdings of real estate. There are casual relationships which govern the correlation.

MBS are bonds. They lie on a different dimension. Sure, they are bonds on real estate. But the factors here are interest rates and personal credit. What is the causal relationship that you see between stocks and MBS? Sure, we have things like 2008 where the real estate market melt down is so bad it spills over to the rest of the economy. Here we see a relationship between MBS, REITs and stocks. But this is kind of the exception to the rule.

REITs, as equities, have unlimited upside. MBS, as bonds, have much lower returns and risks,.
You clumped your actual real estate holdings with REITs in considering your real estate exposure. I agree that MBS bonds are clearly different products - my question was if you would factor in exposure to them (in full or in part) into your total real estate exposure.

MBS (usually housing) and REITs (usually commercial) do appear to have limited correlation so maybe it's a moot point.

msterrr
Posts: 26
Joined: Wed Sep 20, 2017 6:28 am

Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Sat Apr 07, 2018 8:37 am

msterrr wrote:
Tue Oct 03, 2017 11:43 am
Current AA:
25% Intermediate Bonds (VFITX)
25% TIPS (VIPSX)
21% US Stock Market (VTSMX)
11% REIT (VGSIX)
11% Intl Developed (VDVIX)
07% Emerging Markets (VEIEX)
Six month update: tldr is I can stomach more volatility than I thought. My portfolio has evolved into a more streamlined / more globally diversified growth portfolio that I'm very happy with. Thanks again for all the advice.

Current AA:
75% Global Market (VTWSX)
10% Real Estate (QREARX)
07% Intermediate Bonds (VFITX)
07% TIPS (VIPSX)

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