Am i missing anything without REITs..

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Am i missing anything without REITs..

Post by sambb » Sun Oct 22, 2017 12:55 pm

I am a 60/40 investor, and I am on track for retirement. I have about 10 years to go to achieve the goal, if the 60/40 portfolio achieves a below average, but positive return.
Of my net worth, 40% is in taxable, 40% in tax deferred, and 20% in a paid off home.
I am a index investor, with mostly index funds in taxable and target retirement in tax deferred.
I dont have any in REITS, but could add it in the tax deferred.
Is this worthwhile for someone who owns their own home? And should it be international reits?

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Re: Am i missing anything wihtout REITs..

Post by dbr » Sun Oct 22, 2017 1:02 pm

You are not missing anything whether or not you own your own home. REITS are already represented in the total market but not in the proportion real estate represents of all investable assets. But that doesn't matter because REITS are not the same asset class as real estate.

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Re: Am i missing anything wihtout REITs..

Post by ram » Sun Oct 22, 2017 1:13 pm

50% each of your investable assets are in tax deferred and taxable. As you approach retirement you may need increasing amount of space in the tax deferred space for bonds.
If you hold small cap value (SCV) you need tax deferred space for those as well.
I like SCV more than REITS and so REITS are being crowded out of my portfolio.
So I would first decide what ratio of stock:bonds you want and then decide if you have space for REITS on retirement day.
Is your saving rate going to increase in these last 10 yrs. In that case your proportion of taxable to tax deferred may increase by retirement day.
Lets say you care about sequence of returns risk and want a 50:50 ratio at the time of retirement. In that case you will not have space for REITS.
I am no expert but these are the issues I am facing as I am also about 10 yrs from retirement. I believe REITS are optional if space permits.
I am unwilling to put bonds in taxable (lower Interest) just to make space for REITS. I am open to other thoughts from more knowledgeable folks on this board

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Re: Am i missing anything wihtout REITs..

Post by avalpert » Sun Oct 22, 2017 1:20 pm

What is your 60% equity allocation invested in - my guess is you do in fact have investments in REITs.

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Re: Am i missing anything wihtout REITs..

Post by John Laurens » Sun Oct 22, 2017 1:34 pm

You do own domestic and international REITS. Are you asking should you overweight REITS and underweight technology, consumer staples, etc?


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Re: Am i missing anything wihtout REITs..

Post by nisiprius » Sun Oct 22, 2017 2:00 pm

I'm not sure which "index fund" you are talking about, but the Vanguard Total Stock Market Index Fund mirrors the "market portfolio," the entire portfolio of $25 trillion or so worth of stocks that are traded in the stock market itself, with the same weights as the market holds them.

There are many strategies that call for moderate departures from the market portfolio, overweighting some categories of stock relative to the market as a whole, and underweighting others. Some of these strategies are given names like "factor investing," "smart beta," "tilting," and in the forum we used to call it "slice and dice" although I think this nickname is fading. Popular candidates for overweighting include small-cap stocks, value stocks--and REITs.

Because they are moderately different from the market portfolio, any of these strategies will have moderately different performance from the market portfolio. Sometimes they will outperform, the market, sometimes they will underperform. The periods of outperformance and underperformance can be quite long--five years, ten years, or even more. People advocating these strategies are convinced that in the long run they will have better risk-adjusted return than the market, and that the chances that you will actually see it in during the future time period over which you will be investing, is high enough to adopt it (and take the risk that you will see underperformance.

Despite the argument being based on very-long-term expectations, in real life people tend to talk up whichever strategies that have been doing well recently and not talk much about the ones that haven't.

I personally do not think the case for REITs is compelling. However, what I'm about to say suggests that possibly I was an idiot. I dipped a toe into the Vanguard REIT Index Fund, VGSIX, around 2007, largely as a result of Burton Malkiel's high praise for them in A Random Walk Down Wall Street. I believed that REITs were a relatively conservative investment, and I got in just in time to catch the terrible crash--they fell much more than the stock market as a whole during 2008-2009. This convinced me that I was actually in high-risk territory and had no business being there. I waited to "get back to even," then I got out. Arguably I committed behavioral errors, but in my opinion the first error I made was getting into it in the first place. The main thing is that REITs did not actually behave in the way I had been led to expect they would behave!

Vanguard does not overweight REITs in any of their "all-in-one" funds (LifeStrategy, Target Retirement)--not even in their Managed Payout fund which has a more adventurous, trendy, not-traditional-Vanguard-style portfolio.

P.S. To add to what dbr says... your home is a single, illiquid, undiversified investment in residential real estate. REITs are stocks (with special regulations about paying out dividends that makes them somewhat different from other stocks) in companies that own commercial real estate. REITS are somewhat diversified, and the REIT index fund, holding the stocks of 155 different real estate investment trusts, is more diversified. But that didn't stop it from losing two thirds of its value in 2008-2009 (which it then regained). The thing that perhaps gave it a reputation as a diversifier is that in 2000-2002, it went up, very nicely, while the stock market in general was going down.
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