REITS and Swedroe

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Always passive
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REITS and Swedroe

Post by Always passive » Thu Mar 08, 2018 2:18 am

I just finished reading Swedroe's book on alternatives (2008) and wonder why the 3 fund portfolio does not include REITs. I understand that in the stock indexes there is a REITs component, but is it enough?
Swedroe seems to like REITs (suggests up to 15% of the portfolio equity portion), not only US but also international. He claims that they have a good long term return, a decent sharp ratio and a low correlation to stocks and bonds. He suggests, as expected, to hold them in IRAs.
Any comments?

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Re: REITS and Swedroe

Post by AlohaJoe » Thu Mar 08, 2018 2:35 am

There's an entire thread about the 3-fund portfolio: viewtopic.php?t=88005

I haven't read it but I'm sure someone in there has asked about REITs previously and there's a good chance Taylor has always mentioned why he didn't include REITs.

Actually, a simple search on "REIT" in that thread turned up:

viewtopic.php?f=10&t=88005&p=2060920&hi ... T#p2060920

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Re: REITS and Swedroe

Post by Valuethinker » Thu Mar 08, 2018 6:17 am

Always passive wrote:
Thu Mar 08, 2018 2:18 am
I just finished reading Swedroe's book on alternatives (2008) and wonder why the 3 fund portfolio does not include REITs. I understand that in the stock indexes there is a REITs component, but is it enough?
Swedroe seems to like REITs (suggests up to 15% of the portfolio equity portion), not only US but also international. He claims that they have a good long term return, a decent sharp ratio and a low correlation to stocks and bonds. He suggests, as expected, to hold them in IRAs.
Any comments?
It would then be a 4 Fund portfolio ;-).

There's a case for REITs, mostly about better inflation protection (rents are more correlated with inflation than stock prices are, generally; also REITs tend to borrow long term on fixed term, and thus higher inflation reduces the burden of their debt).

However it's a small sector in stock market terms, and the companies are financially leveraged. Thus, as 2008-09 showed, when we hit a bear market, REITs can be significantly more volatile than stock markets as a whole.

You have to be able to look at that chart 2008-09, imagine if 10% of your portfolio had dropped to 3%, and say "yes, I would shrug and just rebalance". And you cannot assume that in a repeat, the interventions of world Treasury/ Finance ministers and Central Banks like the Fed would lead to a rapid recovery. There has not been such a recovery in Japan since 1990, for example.

2000-03 was of course the opposite. The tech sector got hugely overvalued (along with telecoms and media) and REITs and many other "value" sectors just ignored by the market in the late 1990s. Thus, the bear market hit the TMT, hard, and REITs did very well. You do get these pockets of extreme undervaluation in various sectors, from time to time.

But again, there's no sign now that REITs are so undervalued relative to the market as a whole.

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Re: REITS and Swedroe

Post by JohnDindex » Thu Mar 08, 2018 6:46 am

I am pretty sure he no longer recommends REITS due to valuations. He seems to not include them in his latest writings about "alternatives". I don't think this is the case with DFA or Bridgeway small value funds, but vanguard small value holds a good bit of real estate, so that is something else to factor in.

I noticed Rick Ferri is posting again...I wonder if he still recommends REITS???? His book on asset allocation is very good.

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Re: REITS and Swedroe

Post by boglewill34 » Thu Mar 08, 2018 9:28 am

I've seen it posted before, but I think a sane way to look at REITS vis a vis a portfolio is to include real estate we already have, our homes, and whether and to what extent it is already leveraged. Most people are already pretty yoked to real estate and the risks thereof, so adding more via REITS may not be the wisest idea.

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Re: REITS and Swedroe

Post by nedsaid » Thu Mar 08, 2018 9:55 am

boglewill34 wrote:
Thu Mar 08, 2018 9:28 am
I've seen it posted before, but I think a sane way to look at REITS vis a vis a portfolio is to include real estate we already have, our homes, and whether and to what extent it is already leveraged. Most people are already pretty yoked to real estate and the risks thereof, so adding more via REITS may not be the wisest idea.
Well, not quite. REITs have cash flows as renters pay rents to the REIT and ultimately to you. My home has appreciated in value but it puts demands upon my cash flows and not enhance them. A home really is not an investment, it is a place to live and raise your family. If you happen to enjoy price appreciation, so much the better. Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
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Re: REITS and Swedroe

Post by iceport » Thu Mar 08, 2018 10:16 am

JohnDindex wrote:
Thu Mar 08, 2018 6:46 am
I am pretty sure he no longer recommends REITS due to valuations. He seems to not include them in his latest writings about "alternatives". I don't think this is the case with DFA or Bridgeway small value funds, but vanguard small value holds a good bit of real estate, so that is something else to factor in.

I noticed Rick Ferri is posting again...I wonder if he still recommends REITS???? His book on asset allocation is very good.
Boglehead authors all advocate discipline over attempting to devise a perfect asset allocation. And their general recommendations, as far as I've read, are all intended to be more or less permanent. How could it be that they would change their recommendations based on short term market conditions?

Sure, Bogle has his tactical asset allocation, and Bernstein often admits a soft spot for adjustments based on valuations. And Swensen has made an adjustment to his model portfolio for individual investors, adding 5% to emerging markets, achieved by reducing REITs from 20% to 15% of the portfolio. But in all three cases, these are relatively minor adjustments to asset allocations, not wholesale adding and/or removing of whole asset sub-classes.

It would be disappointing for me to learn that an asset allocation proposed as a model 5 or 10 years ago by a passive investing advocate would somehow become outdated to the point of removing an entire asset sub-class.

If Larry Swedroe has indeed eliminated REITs from his generic portfolio recommendations, I would be surprised and disappointed.
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by dbr » Thu Mar 08, 2018 10:37 am

Always passive wrote:
Thu Mar 08, 2018 2:18 am
I just finished reading Swedroe's book on alternatives (2008) and wonder why the 3 fund portfolio does not include REITs.
I suppose the whole point is that it is a three fund portfolio and not a four-five-six fund portfolio. Another poster made the same point.

Then there is this: https://www.youtube.com/watch?v=1W3I3jGfWvo

"You can keep your . . . four fund, five fund, six fund . . . portfolio . . . I got my three fund portfolio."

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Re: REITS and Swedroe

Post by boglewill34 » Thu Mar 08, 2018 10:45 am

nedsaid wrote:
Thu Mar 08, 2018 9:55 am
boglewill34 wrote:
Thu Mar 08, 2018 9:28 am
I've seen it posted before, but I think a sane way to look at REITS vis a vis a portfolio is to include real estate we already have, our homes, and whether and to what extent it is already leveraged. Most people are already pretty yoked to real estate and the risks thereof, so adding more via REITS may not be the wisest idea.
Well, not quite. REITs have cash flows as renters pay rents to the REIT and ultimately to you. My home has appreciated in value but it puts demands upon my cash flows and not enhance them. A home really is not an investment, it is a place to live and raise your family. If you happen to enjoy price appreciation, so much the better. Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
I appreciate and understand the distinction between individual home equity and income on rents from REITs. To put a finer point on what I intended to get across is that there is a non-insignificant correlation between equity in a personal home and equity value in REITs, and even on incomes thereon. Given the fungibility of the cash you'd have to use to buy a REIT, one could instead choose to employ it in an asset less correlated to one already owned (house), or gain more equity in it.

Some days I'd like to be convinced otherwise, because REIT yield is attractive and I'm in a very low/negligible tax bracket. So I'm open for the discussion.

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Re: REITS and Swedroe

Post by asif408 » Thu Mar 08, 2018 10:49 am

In a much more recent 2017 article, he wasn't so high on them (at least in the US): http://www.etf.com/sections/index-inves ... nopaging=1

The reason the 3 fund portfolio doesn't contain them is that it isn't designed to bet on sectors. If you want to add REITs, that's fine, just understand what that entails.

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Re: REITS and Swedroe

Post by Jebediah » Thu Mar 08, 2018 11:12 am

nedsaid wrote:
Thu Mar 08, 2018 9:55 am
Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
Home ownership does indeed generate cash flow in the form of imputed rent.

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Re: REITS and Swedroe

Post by nisiprius » Thu Mar 08, 2018 11:35 am

Always passive wrote:
Thu Mar 08, 2018 2:18 am
I just finished reading Swedroe's book on alternatives (2008) and wonder why the 3 fund portfolio does not include REITs. I understand that in the stock indexes there is a REITs component, but is it enough?
Enough for what?

If you are asking whether people think a three-fund portfolio is optimum, I can only speak for myself: no, I don't think it is. I am a satisficer, not an optimizer. I think a three-fund portfolio is good enough, and I don't think that I--or any of the confident gurus I've read--can tell whether anything else is likely to be any better.

If you are asking whether Larry Swedroe would recommend a three-fund portfolio, I can't speak for him but I feel pretty confident the answer would be "no." After all, he doesn't even recommend the Vanguard Total Bond Market Index Fund because he doesn't think bond investors should hold any mortgage-backed securities. Larry Swedroe's recommendation, published in detail in The Only Guide To Winning Investment Strategy You'll Ever Need: Index Funds and Beyond--The Way Smart Money Creates Wealth Today, was a ten-fund portfolio:

Image

And obviously, whatever Larry Swedroe intended to do with an 6% REIT allocation (it was only 5% in the 1998 edition of his book), 6% REITS = in a 60%-stocks portfolio = 10% of stocks. The natural allocation in Total Stock, i.e. the allocation to REITS in Total Stock, i.e. the amount that investors in the stock market collectively allocate in REITs, is 3.44%. Obviously, if you think 10% of stocks should be REITs, then you would think that 3.44% of stocks would not be "enough" to do whatever you were trying to do.

But what's interesting here is that Larry Swedroe has also written, in The Quest for Alpha, "Rules for Prudent Investing,"
#17: Owning individual stocks and sector funds is more akin to speculating, not investing. The market compensates investors for risks that cannot be diversified away, like the risk of investing in stocks versus bonds. Investors shouldn't expect compensation for diversifiable risk--the unique risks related to owning one stock or sector or country fund. Prudent investors only accept risk for which they will be compensated with higher expected returns.
So, in one place, he is recommending an allocation to an individual sector fund, while in another cautioning that such an investment is not prudent.

Broadly speaking, one of the interesting things that happened in 2000-2002 is that several of the asset classes recommended by "slice-and-dicers" (now more commonly called "factor investors") rose nicely, or at least didn't fall much, while the stock market in general was going down. It was really very impressive, since the recommendations to hold these classes were longstanding and had made well before 2000. Unfortunately, these asset classes failed to repeat that performance in 2008-2009 or in the 2010 correction.

2000-2002, REITs in blue, small-cap value in orange, stock market as a whole in green.

Image
Last edited by nisiprius on Thu Mar 08, 2018 5:07 pm, edited 1 time in total.
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Re: REITS and Swedroe

Post by Dominic » Thu Mar 08, 2018 11:55 am

I believe Larry isn't too fond of REITs these days. The reason they correlate with stocks poorly is that they're high dividend, and typically small-cap value stocks. Thus, they have a lot of exposure to the size, value, and term premiums. Account for all those, and REITs are really nothing special. In other words, you can achieve the same effect by buying a small-cap value fund and a bond fund, but without the sector risk of REITs.
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
boglewill34 wrote:
Thu Mar 08, 2018 9:28 am
I've seen it posted before, but I think a sane way to look at REITS vis a vis a portfolio is to include real estate we already have, our homes, and whether and to what extent it is already leveraged. Most people are already pretty yoked to real estate and the risks thereof, so adding more via REITS may not be the wisest idea.
Well, not quite. REITs have cash flows as renters pay rents to the REIT and ultimately to you. My home has appreciated in value but it puts demands upon my cash flows and not enhance them. A home really is not an investment, it is a place to live and raise your family. If you happen to enjoy price appreciation, so much the better. Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
This is something that Bill Bernstein has talked about quite a bit recently. Home ownership generates something like a 1% real return on average, and if I remember correctly, that's before costs. Of course, you save yourself the expense of paying rent in exchange for those expenses. However, your investment is incredibly concentrated. You're tied to one property in one housing market. If good jobs start moving elsewhere, you're at risk of losing money.

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Re: REITS and Swedroe

Post by nedsaid » Thu Mar 08, 2018 9:23 pm

Dominic wrote:
Thu Mar 08, 2018 11:55 am
I believe Larry isn't too fond of REITs these days. The reason they correlate with stocks poorly is that they're high dividend, and typically small-cap value stocks. Thus, they have a lot of exposure to the size, value, and term premiums. Account for all those, and REITs are really nothing special. In other words, you can achieve the same effect by buying a small-cap value fund and a bond fund, but without the sector risk of REITs.
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
boglewill34 wrote:
Thu Mar 08, 2018 9:28 am
I've seen it posted before, but I think a sane way to look at REITS vis a vis a portfolio is to include real estate we already have, our homes, and whether and to what extent it is already leveraged. Most people are already pretty yoked to real estate and the risks thereof, so adding more via REITS may not be the wisest idea.
Well, not quite. REITs have cash flows as renters pay rents to the REIT and ultimately to you. My home has appreciated in value but it puts demands upon my cash flows and not enhance them. A home really is not an investment, it is a place to live and raise your family. If you happen to enjoy price appreciation, so much the better. Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
This is something that Bill Bernstein has talked about quite a bit recently. Home ownership generates something like a 1% real return on average, and if I remember correctly, that's before costs. Of course, you save yourself the expense of paying rent in exchange for those expenses. However, your investment is incredibly concentrated. You're tied to one property in one housing market. If good jobs start moving elsewhere, you're at risk of losing money.
Last I looked, the Vanguard REIT Index was in Mid-Cap Core. Valuations got to the point where the REIT Index was kissing the line between Mid-Cap Core and Mid-Cap Growth. That is a long ways from Small-Cap Value. What was true at one time is no longer true today. But REIT valuations seem to be improving, yields are up from 3% to 4 1/2% and the REIT Index is moving in the direction towards Value. But still not cheap.
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Re: REITS and Swedroe

Post by nedsaid » Thu Mar 08, 2018 9:24 pm

Jebediah wrote:
Thu Mar 08, 2018 11:12 am
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
Home ownership does indeed generate cash flow in the form of imputed rent.
Cash is what pays bills. Imputed anything does not.
A fool and his money are good for business.

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Re: REITS and Swedroe

Post by JohnDindex » Fri Mar 09, 2018 6:51 am

iceport wrote:
Thu Mar 08, 2018 10:16 am
JohnDindex wrote:
Thu Mar 08, 2018 6:46 am
I am pretty sure he no longer recommends REITS due to valuations. He seems to not include them in his latest writings about "alternatives". I don't think this is the case with DFA or Bridgeway small value funds, but vanguard small value holds a good bit of real estate, so that is something else to factor in.

I noticed Rick Ferri is posting again...I wonder if he still recommends REITS???? His book on asset allocation is very good.
Boglehead authors all advocate discipline over attempting to devise a perfect asset allocation. And their general recommendations, as far as I've read, are all intended to be more or less permanent. How could it be that they would change their recommendations based on short term market conditions?

Sure, Bogle has his tactical asset allocation, and Bernstein often admits a soft spot for adjustments based on valuations. And Swensen has made an adjustment to his model portfolio for individual investors, adding 5% to emerging markets, achieved by reducing REITs from 20% to 15% of the portfolio. But in all three cases, these are relatively minor adjustments to asset allocations, not wholesale adding and/or removing of whole asset sub-classes.

It would be disappointing for me to learn that an asset allocation proposed as a model 5 or 10 years ago by a passive investing advocate would somehow become outdated to the point of removing an entire asset sub-class.

If Larry Swedroe has indeed eliminated REITs from his generic portfolio recommendations, I would be surprised and disappointed.
Well, get ready to be surprised and disappointed. You can search the site from when he was still posting, he lays out a fairly logical explanation for his changes over the years. Most of the books I have read become dated after a decade or so...I happen to be reading the four pillars again last night and there are certainly some things in it that no one (or few) on here are doing currently. Example - GNMA fund.

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Re: REITS and Swedroe

Post by iceport » Fri Mar 09, 2018 7:51 am

JohnDindex wrote:
Fri Mar 09, 2018 6:51 am
Well, get ready to be surprised and disappointed. You can search the site from when he was still posting, he lays out a fairly logical explanation for his changes over the years.
Okay, can you cite any specific evidence that Larry Swedroe no longer recommends incorporating REITs into his model portfolios, maybe from a recent book or a prior post?

Thanks.
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by Valuethinker » Fri Mar 09, 2018 8:05 am

nedsaid wrote:
Thu Mar 08, 2018 9:24 pm
Jebediah wrote:
Thu Mar 08, 2018 11:12 am
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
Home ownership does indeed generate cash flow in the form of imputed rent.
Cash is what pays bills. Imputed anything does not.
Economics, though.

You could rent a car every time you use one (or use Uber). Instead you choose to have a large up front sum and then relatively low usage costs (gas & insurance, maintenance). In truth, most people are probably unaware of how much the latter option actually costs them (unless you keep your cars 10 years+).

But there's another example. There is an "imputed rent" in car ownership.

So from an economic point of view, you can spend the cash all up front and buy the house. Although studies seem to show the actual ownership costs of a house are underestimated by most (property taxes, repairs & maintenance etc). Or you could spend the cash monthly by renting.

There have been considerable tax advantages to ownership in the USA, but perhaps less going forward?

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Re: REITS and Swedroe

Post by JohnDindex » Fri Mar 09, 2018 8:54 am

iceport wrote:
Fri Mar 09, 2018 7:51 am
JohnDindex wrote:
Fri Mar 09, 2018 6:51 am
Well, get ready to be surprised and disappointed. You can search the site from when he was still posting, he lays out a fairly logical explanation for his changes over the years.
Okay, can you cite any specific evidence that Larry Swedroe no longer recommends incorporating REITs into his model portfolios, maybe from a recent book or a prior post?

Thanks.
Mon Dec 12, 2016 9:34 am

A few things

First, as I have said valuations matter and they matter a great deal, not just a little. With that said I ignore them unless they get to "extreme" levels where I would not buy an asset any longer because there isn't a reasonable risk premium to be expected. That happens rarely. I've made just a couple of changes in last 20+ years. First in 98 getting out of all but value stocks and eventually moving to all small value based on the ideas explained in Reducing the Risk of Black Swans and wanting to move more toward a risk parity type of strategy, diversifying more equally across factors. The other was to get out of REITs (at least US) because valuations had gotten to point that there was almost no longer any risk premium and it's still very low today.

Second, I also think that because it's very slippery slope here, and you'll never know when it's "time to get back in" I would suggest doing any changes only if you are prepared basically to live with them forever. Given that the more recent research shows that REITS aren't all that unique as an asset class, acting like combination of small value and term risk (have long term leases) and that once you diversify across factors and globally there isn't that much benefit from adding REITS I was okay with that, and think that's true for all investors.
Larry is a big fan of estimating future returns and then using tactical asset allocation.
This statement I would agree with the first part as IMO there is no way to make any rational decision about investing without doing it. Without a forecast of returns you cannot know your need to take risk and thus cannot make any rational decision on AA. But I very much disagree with the second, with the caveat that at EXTREME levels one should not ignore valuations and then should act. The two examples I give are that in 1999 the E/P was well below the rate on riskless TIPS (at least for the market, but not for value stocks) and the other was a few years ago when the yield on REITS less the negative growth in real earnings had led to virtually no real expected return to REITS, so I got out. In both cases when I made the changes I knew I might be "wrong" for a while but was confident that it was highly likely to be right in the long term.

Finally, I would add that for the vast majority of investors if they build well diversified portfolios, globally and across factors (which minimizes the risks of bubbles) then they should stick to their AA and simply rebalance, which at least gets you to sell at relatively high valuations and buy at relatively low ones. So what I do for myself I don't recommend others due because I won't confuse strategy with outcome and second guess decisions while others will likely to do so, or at least be prone to doing so. Which then leads to big mistakes.

A good example is that for last few years small value had done relatively poorly. But in just last 5 weeks or so the fund I own for US SV BOSVX is up something like 30% and is now outperformed ytd the S&P 500 by about 24% and is now 2% ahead of it for last 5 years. Great example of how much of excess returns in all asset classes shows up over very short periods and thus the only way you can capture them is to be like a deer hunter who sits waiting patiently for the deer to show up. You have to be there all the time.

So bottom line is that if you have an allocation to REITS you are likely best served by just sticking with it and rebalancing. But personally I would not buy them TODAY. While yields have risen with the recent fall in REIT prices the current yield on Vanguard REIT is 3.6% and if you subtract say even 2% from expected growth you get a risk premium of just 1.6% over tbills. To me that's too small a premium to take the risks. But that's personal opinion.

I hope above is helpful
Larry

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Re: REITS and Swedroe

Post by Always passive » Fri Mar 09, 2018 9:16 am

nedsaid wrote:
Thu Mar 08, 2018 9:23 pm
Dominic wrote:
Thu Mar 08, 2018 11:55 am
I believe Larry isn't too fond of REITs these days. The reason they correlate with stocks poorly is that they're high dividend, and typically small-cap value stocks. Thus, they have a lot of exposure to the size, value, and term premiums. Account for all those, and REITs are really nothing special. In other words, you can achieve the same effect by buying a small-cap value fund and a bond fund, but without the sector risk of REITs.
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
boglewill34 wrote:
Thu Mar 08, 2018 9:28 am
I've seen it posted before, but I think a sane way to look at REITS vis a vis a portfolio is to include real estate we already have, our homes, and whether and to what extent it is already leveraged. Most people are already pretty yoked to real estate and the risks thereof, so adding more via REITS may not be the wisest idea.
Well, not quite. REITs have cash flows as renters pay rents to the REIT and ultimately to you. My home has appreciated in value but it puts demands upon my cash flows and not enhance them. A home really is not an investment, it is a place to live and raise your family. If you happen to enjoy price appreciation, so much the better. Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
This is something that Bill Bernstein has talked about quite a bit recently. Home ownership generates something like a 1% real return on average, and if I remember correctly, that's before costs. Of course, you save yourself the expense of paying rent in exchange for those expenses. However, your investment is incredibly concentrated. You're tied to one property in one housing market. If good jobs start moving elsewhere, you're at risk of losing money.
Last I looked, the Vanguard REIT Index was in Mid-Cap Core. Valuations got to the point where the REIT Index was kissing the line between Mid-Cap Core and Mid-Cap Growth. That is a long ways from Small-Cap Value. What was true at one time is no longer true today. But REIT valuations seem to be improving, yields are up from 3% to 4 1/2% and the REIT Index is moving in the direction towards Value. But still not cheap.
If valuations are being used to decide if to hold or not REITs, it seems to me the we should all sell the Total US Stock market. I tend to disagree and think that there is a fundamental question, are REITs an integral part of a well balanced portfolio. If yes, then let us make it part of it and allow the rebalance process take care of valuations. Does that not make sense?

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Re: REITS and Swedroe

Post by dbr » Fri Mar 09, 2018 9:18 am

Always passive wrote:
Fri Mar 09, 2018 9:16 am

If valuations are being used to decide if to hold or not REITs, it seems to me the we should all sell the Total US Stock market. I tend to disagree and think that My point that the fundamental question is wether REITs are or are not an integral part of a well balanced portfolio. If yes, then let us make it part of it and allow the rebalance process take care of valuations. Does that not make sense?
It does to me.

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Re: REITS and Swedroe

Post by iceport » Fri Mar 09, 2018 9:39 am

JohnDindex wrote:
Fri Mar 09, 2018 8:54 am
iceport wrote:
Fri Mar 09, 2018 7:51 am
JohnDindex wrote:
Fri Mar 09, 2018 6:51 am
Well, get ready to be surprised and disappointed. You can search the site from when he was still posting, he lays out a fairly logical explanation for his changes over the years.
Okay, can you cite any specific evidence that Larry Swedroe no longer recommends incorporating REITs into his model portfolios, maybe from a recent book or a prior post?

Thanks.
Mon Dec 12, 2016 9:34 am
Thanks. For the convenience of other readers, here is a direct link to the prior thread, which addresses the OP's question, and we can read more from Larry, in his own words:

I thought Swedroe was a fan of REITs?

For what it's worth, I don't take Larry's comments as a recommendation against REITs, but rather as a warning to manage expectations. Here are some cherry-picked excerpts to support the notion that he is *not* recommending against holding REITs in a portfolio.

(BTW, I find Rodc's perspective particularly illuminating, as always. I wish he posted here more often.)
Second, I also think that because it's very slippery slope here, and you'll never know when it's "time to get back in" I would suggest doing any changes only if you are prepared basically to live with them forever.
Or at least until you read an updated prediction from Larry???
Finally, I would add that for the vast majority of investors if they build well diversified portfolios, globally and across factors (which minimizes the risks of bubbles) then they should stick to their AA and simply rebalance, which at least gets you to sell at relatively high valuations and buy at relatively low ones. So what I do for myself I don't recommend others due because I won't confuse strategy with outcome and second guess decisions while others will likely to do so, or at least be prone to doing so. Which then leads to big mistakes. [Emphasis added.]
Amen to that!
So bottom line is that if you have an allocation to REITS you are likely best served by just sticking with it and rebalancing.
That's what I intend to do, thanks.
I hope above is helpful
Larry
Yes and no. While it is somewhat informative, I think it unnecessarily causes investors to question their supposedly "buy-hold-and-rebalance" strategy and their specific asset allocations. It's a mixed message.
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by JohnDindex » Fri Mar 09, 2018 10:50 am

FWIW Larry usually will respond to a PM, so maybe he would be able to provide further clarification and current view/outlook.

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Re: REITS and Swedroe

Post by nedsaid » Fri Mar 09, 2018 9:13 pm

Always passive wrote:
Fri Mar 09, 2018 9:16 am
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
Last I looked, the Vanguard REIT Index was in Mid-Cap Core. Valuations got to the point where the REIT Index was kissing the line between Mid-Cap Core and Mid-Cap Growth. That is a long ways from Small-Cap Value. What was true at one time is no longer true today. But REIT valuations seem to be improving, yields are up from 3% to 4 1/2% and the REIT Index is moving in the direction towards Value. But still not cheap.
If valuations are being used to decide if to hold or not REITs, it seems to me the we should all sell the Total US Stock market. I tend to disagree and think that there is a fundamental question, are REITs an integral part of a well balanced portfolio. If yes, then let us make it part of it and allow the rebalance process take care of valuations. Does that not make sense?
For the record, I trimmed my REITs back by 20% a couple of years ago. A few reasons, first REITs had been doing really, really well and it made sense to do some trimming. Second, valuations were getting high enough that future expected returns on REITs were projected to be just a hair (0.1% or 0.2%) above inflation. Third, a couple of big Timber REITs that I owned merged. I sold a portion of the merged company because it was getting to be a larger position in one stock than I was comfortable with. I did, however, decide to keep the remaining 80%.

I consider REITs to be an integral part of my portfolio. Because they often have low correlation to the US Stock Market, they still offered a diversification benefit even if future returns were expected to be quite muted. Yes, the old buy, hold, and rebalance routine holds true with REITs, that is if you believe in them.

When REITs reached their peak of valuation, my advice to new investors was to pass. At the same time, I told those who already owned REITs to rebalance. The problem is, there gets to be a point where higher and higher valuations gets to be a problem. The income investors seeking yield at any price chased REITs to very high prices, hence my loss of enthusiasm for them. High valuations mean lower expected future returns and REITs were not attractive. It almost got to the point where an investor would have been better off in bonds. REITs can be quite volatile, I have seen them fluctuate 10% in one day! If REIT returns going forward were bond-like, it would have made sense to just be in the less volatile bonds.

Now that valuations are better, I feel better about them as an investment, they still are not cheap. No "buy" signal from me. Not yet.
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Re: REITS and Swedroe

Post by iceport » Sat Mar 10, 2018 9:26 am

JohnDindex wrote:
Fri Mar 09, 2018 10:50 am
FWIW Larry usually will respond to a PM, so maybe he would be able to provide further clarification and current view/outlook.
For anyone who believes Larry Swedroe no longer recommends REITs, I must ask: What value should we place on the advice of someone who recommends allocating 10% of all equities to a dedicated REIT fund in a book entitled, literally, "The Only Guide to a Winning Investment Strategy You'll Ever Need" — and then changes his mind?

It's actually humorous when you think about it.
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Re: REITS and Swedroe

Post by nedsaid » Sat Mar 10, 2018 9:59 am

iceport wrote:
Sat Mar 10, 2018 9:26 am
JohnDindex wrote:
Fri Mar 09, 2018 10:50 am
FWIW Larry usually will respond to a PM, so maybe he would be able to provide further clarification and current view/outlook.
For anyone who believes Larry Swedroe no longer recommends REITs, I must ask: What value should we place on the advice of someone who recommends allocating 10% of all equities to a dedicated REIT fund in a book entitled, literally, "The Only Guide to a Winning Investment Strategy You'll Ever Need" — and then changes his mind?

It's actually humorous when you think about it.
I suppose absolutely everything you have ever posted is timeless wisdom that will never change.

Can't speak for Larry but I suppose what he would say is that if you have REITs, to keep them and rebalance when necessary. He advised those not invested in REITs to hold off, mainly because of valuations.

Very few people anticipated the 2008-2009 financial crisis. Some pretty smart people were saying that subprime was a tempest in a teapot and it turned out to be wrong. There was more subprime junk out there than what smart people realized. Markets and the economy crashed and bond yields fell hard. No one forsaw the fanatical yield chasing that drove REIT valuations sky high. Low Volatility stocks, which tend to be higher dividend payors got chased so hard that they went from being Value stocks to Growth stocks. Investors chased High Yield Bonds very hard, so much so that yield spreads between these and Investment Grade bonds got to historically low levels. Plus Governments and Central Banks all over the world adopted very low interest rate and very easy money policies to stave off a second Great Depression. Pretty much dropping money out of helicopters.

The financial markets got distorted in ways that nobody would have ever dreamed. Conditions changed and Larry changed his recommendations. Isn't that what any reasonable person would do?

I am 58. I don't invest the way I did when I was in my thirties. My life situation has changed and my investment approach has changed with it. I just don't get your thinking that once something is in print that it is immutable and never should change. Markets and the economy are dynamic.
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Re: REITS and Swedroe

Post by iceport » Sat Mar 10, 2018 10:42 am

nedsaid wrote:
Sat Mar 10, 2018 9:59 am
iceport wrote:
Sat Mar 10, 2018 9:26 am
JohnDindex wrote:
Fri Mar 09, 2018 10:50 am
FWIW Larry usually will respond to a PM, so maybe he would be able to provide further clarification and current view/outlook.
For anyone who believes Larry Swedroe no longer recommends REITs, I must ask: What value should we place on the advice of someone who recommends allocating 10% of all equities to a dedicated REIT fund in a book entitled, literally, "The Only Guide to a Winning Investment Strategy You'll Ever Need" — and then changes his mind?

It's actually humorous when you think about it.
I suppose absolutely everything you have ever posted is timeless wisdom that will never change.
Nope. But then I never claimed it to be, so there is a difference.
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
Can't speak for Larry but I suppose what he would say is that if you have REITs, to keep them and rebalance when necessary. He advised those not invested in REITs to hold off, mainly because of valuations.
I agree with you.
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
I am 58. I don't invest the way I did when I was in my thirties. My life situation has changed and my investment approach has changed with it. I just don't get your thinking that once something is in print that it is immutable and never should change. Markets and the economy are dynamic.
So where does staying the course figure into your portfolio? I gather that you actively manage your portfolio? That's fine for you. If you believe you can beat the market by adjusting your asset allocation based on valuations, I wish you all the best. I prefer a passive approach.

All of the experts I have read who advocate a passive approach to investing — including Larry Swedroe, though perhaps to a lesser degree than most — stress the enormous importance of sticking with an asset allocation. It's far more important than choosing the "correct" asset allocation. Finalize a good one and then stick with it. (See signature line for a prime example.)

REIT valuations are high. So what? Did Larry's earlier "only advice you'll ever need" come with an asterisk saying to drop the 10% REIT allocation when valuations exceed a certain threshold?

I would argue that the small investor audience Larry's books were written for are perhaps not the ones who should be attempting tactical asset allocation. I know I'm not. And, I would venture to add, neither is the OP.
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by iceport » Sat Mar 10, 2018 10:47 am

nedsaid wrote:
Sat Mar 10, 2018 9:59 am
I am 58. I don't invest the way I did when I was in my thirties. My life situation has changed and my investment approach has changed with it. I just don't get your thinking that once something is in print that it is immutable and never should change. Markets and the economy are dynamic.
Oh, and with the exception of my basic equity/fixed income split, I sure wish I was investing exactly as I am now when I was 30. Lack of knowledge and gaps in the available retail products prevented that. Otherwise, my portfolio would be much larger now if I had stuck with the single decent asset allocation I have now for the last 26 years.
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by iceport » Sat Mar 10, 2018 3:40 pm

iceport wrote:
Sat Mar 10, 2018 10:42 am
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
Can't speak for Larry but I suppose what he would say is that if you have REITs, to keep them and rebalance when necessary. He advised those not invested in REITs to hold off, mainly because of valuations.
I agree with you.
Actually, this advice is logically flawed. If there's one thing that lump sum advocates (like Larry Swedroe vs. DCA sympathizers like me) have drilled permanently into my brain, it's that there is no logical difference between owning an asset and buying an asset. The decision to hold an asset on any given day is equivalent to not owning it and deciding to buy it on that day.

I guess this is one way of backtracking on prior advice while giving the illusion of not backtracking. :wink:
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by Jebediah » Sat Mar 10, 2018 4:54 pm

nedsaid wrote:
Thu Mar 08, 2018 9:24 pm
Jebediah wrote:
Thu Mar 08, 2018 11:12 am
nedsaid wrote:
Thu Mar 08, 2018 9:55 am
Unlike renting, you have the opportunity to build equity but home ownership does not generate cash flow.
Home ownership does indeed generate cash flow in the form of imputed rent.
Cash is what pays bills. Imputed anything does not.
Of course it does. Money is fungible. Savings is imputed earnings.

Say tomorrow you decide to move away and rent your house out for 2K a month. Did your home suddenly change from a $0/month yielding asset to a $2K/month yielding asset?

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Re: REITS and Swedroe

Post by nedsaid » Sat Mar 10, 2018 7:39 pm

iceport wrote:
Sat Mar 10, 2018 10:42 am

So where does staying the course figure into your portfolio? I gather that you actively manage your portfolio? That's fine for you. If you believe you can beat the market by adjusting your asset allocation based on valuations, I wish you all the best. I prefer a passive approach.
Actually, my portfolio looks much the same as it did 10 years ago or even 15 years ago. I have made changes over time as I have learned more but even those changes have been made over time. In fact, I still own the first mutual fund that I purchased way back in July of 1984. I am not market timing, I am not constantly tactically changing my asset mix, but I am on the lookout for cheaper assets. Pretty much, I have been telling people to not to performance chase, to exercise a bit of contrarian thinking, and to look for the unloved and the unpopular. I am advising prudence and not running a market timing service.

The "valuations don't matter" crowd just utterly amazes me. I suppose whenever you go shopping, you just pay whatever price the retailer asks for and think that shopping around is a waste of time. Pretty much, I stock up on toilet paper when it goes on sale not pontificating about the efficiency of toilet paper markets.

REITs got to the point where they no longer represented value. Yield chasers chased these to the max. I cut back 20% and decided to keep the rest. I decided that they still offered a diversification benefit and that perhaps there was too much pessimism about their future prospects. Another reason for keeping them is that they are another arrow in the quiver of inflation fighting investments.

I am also amazed that you would not consider the changes in the markets and the economy. Larry's recommendations changed somewhat because the facts on the ground changed. What would you do? For Larry to not warn his clients about such changes would have been irresponsible and a breach of his duty. And yes, I have changed my mind on some things over the years.
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Re: REITS and Swedroe

Post by nedsaid » Sat Mar 10, 2018 7:40 pm

iceport wrote:
Sat Mar 10, 2018 3:40 pm
iceport wrote:
Sat Mar 10, 2018 10:42 am
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
Can't speak for Larry but I suppose what he would say is that if you have REITs, to keep them and rebalance when necessary. He advised those not invested in REITs to hold off, mainly because of valuations.
I agree with you.
Actually, this advice is logically flawed. If there's one thing that lump sum advocates (like Larry Swedroe vs. DCA sympathizers like me) have drilled permanently into my brain, it's that there is no logical difference between owning an asset and buying an asset. The decision to hold an asset on any given day is equivalent to not owning it and deciding to buy it on that day.

I guess this is one way of backtracking on prior advice while giving the illusion of not backtracking. :wink:
So pretty much you are saying that advice once given should never change. I just don't get it.

Probably what I should do is comb through your posts and see if you have ever changed your mind about anything or check for any inconsistency. I suppose if I find something, I should clobber you over the head with it. I don't know, the spirit of the forum is reasoned discussion and the back and forth is how you learn.

I don't know where this idea comes from that an author has to stick with every piece of advice he has ever written even if market and economic conditions have greatly changed. I have watched a lot of John Bogle videos over the years and he has said some pretty surprising things. He has done the same type of thing that Swedroe did and more. John Bogle has a much more flexible mind than what people realize and he does like to think aloud. Did you know that Bogle wrote an article under a pseudonym extolling the virtues of active management? Did you know that Bogle has advocated tactical asset allocation when markets experience extremes of valuation? Did you know that Bogle invests in his son's quant funds? So I suppose we shouldn't listen to him either.

I think you are taking "stay the course" to ridiculous extremes. In general, stay the course is a good philosophy, but you will find that even the great John Bogle made course corrections.
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Re: REITS and Swedroe

Post by iceport » Sat Mar 10, 2018 8:02 pm

nedsaid wrote:
Sat Mar 10, 2018 7:40 pm
iceport wrote:
Sat Mar 10, 2018 3:40 pm
iceport wrote:
Sat Mar 10, 2018 10:42 am
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
Can't speak for Larry but I suppose what he would say is that if you have REITs, to keep them and rebalance when necessary. He advised those not invested in REITs to hold off, mainly because of valuations.
I agree with you.
Actually, this advice is logically flawed. If there's one thing that lump sum advocates (like Larry Swedroe vs. DCA sympathizers like me) have drilled permanently into my brain, it's that there is no logical difference between owning an asset and buying an asset. The decision to hold an asset on any given day is equivalent to not owning it and deciding to buy it on that day.

I guess this is one way of backtracking on prior advice while giving the illusion of not backtracking. :wink:
So pretty much you are saying that advice once given should never change. I just don't get it.
No, what I'm saying is the advice makes no sense. There's no difference between owning REITs and buying REITs. Why should he advocate one and not the other?
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by nedsaid » Sat Mar 10, 2018 8:13 pm

iceport wrote:
Sat Mar 10, 2018 8:02 pm
nedsaid wrote:
Sat Mar 10, 2018 7:40 pm
iceport wrote:
Sat Mar 10, 2018 3:40 pm
iceport wrote:
Sat Mar 10, 2018 10:42 am
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
Can't speak for Larry but I suppose what he would say is that if you have REITs, to keep them and rebalance when necessary. He advised those not invested in REITs to hold off, mainly because of valuations.
I agree with you.
Actually, this advice is logically flawed. If there's one thing that lump sum advocates (like Larry Swedroe vs. DCA sympathizers like me) have drilled permanently into my brain, it's that there is no logical difference between owning an asset and buying an asset. The decision to hold an asset on any given day is equivalent to not owning it and deciding to buy it on that day.

I guess this is one way of backtracking on prior advice while giving the illusion of not backtracking. :wink:
So pretty much you are saying that advice once given should never change. I just don't get it.
No, what I'm saying is the advice makes no sense. There's no difference between owning REITs and buying REITs. Why should he advocate one and not the other?
There is a school of thought out there that if you wouldn't buy something today that you should sell it. While I have some sympathy for that point of view, I have not followed that myself. I tend to take a middle ground to allow for the possibility that I might be wrong. My strong belief is that an investor doesn't have to follow an all or nothing approach. If an asset class that I want to be in for a long time gets to be expensive, I will likely trim back but that doesn't mean that I have to 100% get out.

Another reason that I don't follow an all or nothing approach is that trends in the market can last a long time. Expensive can remain expensive for a long time and cheap can remain cheap a long time. Tilting towards cheaper assets should over time increase your odds for higher returns but ultimately markets will do what markets will do. A big reason that I advocate for patience.

Someone on this thread did message Larry and his response was reposted. I guess you either accept Larry's explanation or you don't. You can always message him yourself.
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Re: REITS and Swedroe

Post by jalbert » Sat Mar 10, 2018 8:17 pm

Lots of respected writers on investing change their recommendations from book to book while simultaneously touting the importance of staying the course.

A small tilt to REITs may improve risk-adjusted return from a diversification benefit, but you can be successful holding the market portfolio or a tilted portfolio that filters out REITs like is done by many DFA funds.
Last edited by jalbert on Mon Mar 12, 2018 12:36 am, edited 1 time in total.
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Re: REITS and Swedroe

Post by MrPotatoHead » Sat Mar 10, 2018 8:25 pm

jalbert wrote:
Sat Mar 10, 2018 8:17 pm
Lots of respected writers on investing change their recomnendations from book to book while simultaneously touting the importance of staying the course.

A small tilt to REITs may improve risk-adjusted return from a diversification benefit, but you can be successful holding the market portfolio or a tilted portfolio that filters out REITs like is done by many DFA funds.
To your first paragraph, yes they do. It is less of a deal for those in tax advantaged accounts but when you have a large amount in taxable it make it difficult. : ( It seems there is a new kid in vogue every semester.

Re REITs in and off them-self, a lot of the theory for including them in a portfolio was simply to reflect economic reality. Real estate is very underrepresented in an index, as the index account for publicly traded equities and not the preponderance of real estate that is privately owned.

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Re: REITS and Swedroe

Post by iceport » Sat Mar 10, 2018 8:29 pm

nedsaid wrote:
Sat Mar 10, 2018 8:13 pm
iceport wrote:
Sat Mar 10, 2018 8:02 pm
nedsaid wrote:
Sat Mar 10, 2018 7:40 pm
iceport wrote:
Sat Mar 10, 2018 3:40 pm
iceport wrote:
Sat Mar 10, 2018 10:42 am


I agree with you.
Actually, this advice is logically flawed. If there's one thing that lump sum advocates (like Larry Swedroe vs. DCA sympathizers like me) have drilled permanently into my brain, it's that there is no logical difference between owning an asset and buying an asset. The decision to hold an asset on any given day is equivalent to not owning it and deciding to buy it on that day.

I guess this is one way of backtracking on prior advice while giving the illusion of not backtracking. :wink:
So pretty much you are saying that advice once given should never change. I just don't get it.
No, what I'm saying is the advice makes no sense. There's no difference between owning REITs and buying REITs. Why should he advocate one and not the other?
There is a school of thought out there that if you wouldn't buy something today that you should sell it. While I have some sympathy for that point of view, I have not followed that myself. I tend to take a middle ground to allow for the possibility that I might be wrong. My strong belief is that an investor doesn't have to follow an all or nothing approach. If an asset class that I want to be in for a long time gets to be expensive, I will likely trim back but that doesn't mean that I have to 100% get out.

Another reason that I don't follow an all or nothing approach is that trends in the market can last a long time. Expensive can remain expensive for a long time and cheap can remain cheap a long time. Tilting towards cheaper assets should over time increase your odds for higher returns but ultimately markets will do what markets will do. A big reason that I advocate for patience.

Someone on this thread did message Larry and his response was reposted. I guess you either accept Larry's explanation or you don't. You can always message him yourself.
nedsaid, I honestly don't know what you are referring to. Someone else did a search of Larry's prior posts in another thread, and cut and pasted it here. The intent was to document that Larry advises against owning REITs — which he doesn't, sort of. I followed up by searching for that thread and providing a live link to the entire discussion, which pretty much addressed the same question as the OP. (There were some excellent points made in that thread, BTW.) Was there new correspondence provided somewhere?

I have no desire to contact Larry on this question. I read Larry's post.
larryswedroe wrote:
Mon Dec 12, 2016 9:34 am
So bottom line is that if you have an allocation to REITS you are likely best served by just sticking with it and rebalancing. But personally I would not buy them TODAY. While yields have risen with the recent fall in REIT prices the current yield on Vanguard REIT is 3.6% and if you subtract say even 2% from expected growth you get a risk premium of just 1.6% over tbills. To me that's too small a premium to take the risks. But that's personal opinion.
Larry said it's OK to HOLD REITs, but not to BUY REITs. And I'm saying there is no difference between holding REITs and buying REITs. This isn't a question of all-or-nothing. It's a question of logic. If an investor owns overvalued REITs, why not just sell them, and be in exactly the same position as the investor being advised not to buy them?
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Re: REITS and Swedroe

Post by spdoublebass » Sat Mar 10, 2018 10:32 pm

nedsaid wrote:
Sat Mar 10, 2018 9:59 am
No one forsaw the fanatical yield chasing that drove REIT valuations sky high.
Nedsaid, would you mind explaining how you calculate your evaluations or what method you use? I know this is a loaded question, I am only asking from a broad perspective for learning. If you went into great detail, much would probably be lost on me.

I do not own REIT's outside of what's in market weight index funds. I started investing a year or so ago and I read many comments like this about REIT's being overvalued so I stayed away so far. With this last dip in the market, I was tempted to add them, but still haven't.

As for my limited knowledge, I have read up on P/E and P/B ratios. I do see how VNQ (Vanguard REits fund) is much higher than VTI (Total Stock) when comparing these numbers. Is it enough to use these simple figures to know if something is overvalued? or should one be looking at other things... That's my basic question.
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Re: REITS and Swedroe

Post by fennewaldaj » Sat Mar 10, 2018 10:48 pm

I am obviously not Nedsaid but I think people say REITs are overvalued because the way they are structured a large % of gains should be from dividends. with low dividend yields expected returns are low.

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Re: REITS and Swedroe

Post by nedsaid » Sun Mar 11, 2018 12:57 am

spdoublebass wrote:
Sat Mar 10, 2018 10:32 pm
nedsaid wrote:
Sat Mar 10, 2018 9:59 am
No one forsaw the fanatical yield chasing that drove REIT valuations sky high.
Nedsaid, would you mind explaining how you calculate your evaluations or what method you use? I know this is a loaded question, I am only asking from a broad perspective for learning. If you went into great detail, much would probably be lost on me.

I do not own REIT's outside of what's in market weight index funds. I started investing a year or so ago and I read many comments like this about REIT's being overvalued so I stayed away so far. With this last dip in the market, I was tempted to add them, but still haven't.

As for my limited knowledge, I have read up on P/E and P/B ratios. I do see how VNQ (Vanguard REits fund) is much higher than VTI (Total Stock) when comparing these numbers. Is it enough to use these simple figures to know if something is overvalued? or should one be looking at other things... That's my basic question.
My methods are pretty simple. First, I look at dividend yield. Historically, REITs yield 6% to 8%. The yield on Vanguard REIT Index got as low as 3.1%. Last I looked, it was 4.5%. Secondly, I look at the Morningstar Stylebox of the REIT Index. It used to be in Mid-Value, migrated all the way to the dividing line between Small-Core and Small-Growth. Now it is solidly in Mid-Core.

There are of course other metrics. Those more knowledgeable about REITs than I can chip in. My analysis is really pretty simple.
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Re: REITS and Swedroe

Post by nedsaid » Sun Mar 11, 2018 12:57 am

fennewaldaj wrote:
Sat Mar 10, 2018 10:48 pm
I am obviously not Nedsaid but I think people say REITs are overvalued because the way they are structured a large % of gains should be from dividends. with low dividend yields expected returns are low.
This is correct.
A fool and his money are good for business.

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Re: REITS and Swedroe

Post by abuss368 » Sun Mar 11, 2018 1:18 am

We have invested in REITS for a long time. First as individual stocks and now simply the Vanguard U.S. and International REIT Index Funds. This has worked out well and we will stay the course.
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Re: REITS and Swedroe

Post by dbr » Mon Mar 12, 2018 8:48 am

abuss368 wrote:
Sun Mar 11, 2018 1:18 am
We have invested in REITS for a long time. First as individual stocks and now simply the Vanguard U.S. and International REIT Index Funds. This has worked out well and we will stay the course.
What does it mean to say something has "worked out well." I don't own any REITs beyond what might be in total stock market and that has also worked out well and we will also stay the course. So, what would we recommend to an investor asking if they should add a concentration to REITs? I would tell them to study the possible advantages and disadvantages and make up their own mind.

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Re: REITS and Swedroe

Post by iceport » Mon Mar 12, 2018 9:57 am

nedsaid wrote:
Sat Mar 10, 2018 7:39 pm
iceport wrote:
Sat Mar 10, 2018 10:42 am

So where does staying the course figure into your portfolio? I gather that you actively manage your portfolio? That's fine for you. If you believe you can beat the market by adjusting your asset allocation based on valuations, I wish you all the best. I prefer a passive approach.
<snip>

The "valuations don't matter" crowd just utterly amazes me. I suppose whenever you go shopping, you just pay whatever price the retailer asks for and think that shopping around is a waste of time. Pretty much, I stock up on toilet paper when it goes on sale not pontificating about the efficiency of toilet paper markets.

<snip>

I am also amazed that you would not consider the changes in the markets and the economy. Larry's recommendations changed somewhat because the facts on the ground changed. What would you do? For Larry to not warn his clients about such changes would have been irresponsible and a breach of his duty. And yes, I have changed my mind on some things over the years.
nedsaid,

It would seem that I have somehow offended you; that was not my intention. One of my pet peeves is respected authors contradicting their own advice. Larry Swedroe's example with respect to REITs is, sadly, not rare at all. jailbert said it well:
jalbert wrote:
Sat Mar 10, 2018 8:17 pm
Lots of respected writers on investing change their recommendations from book to book while simultaneously touting the importance of staying the course.
That doesn't mean we must all remain willfully blind to the various contradictions.

As for your amazement by passive investing, that alone is amazing, considering you've been a member of the forum for over 5 years, and have over 9000 posts.
nedsaid wrote:
Sat Mar 10, 2018 7:39 pm
The "valuations don't matter" crowd just utterly amazes me.
nedsaid wrote:
Sat Mar 10, 2018 7:39 pm
I am also amazed that you would not consider the changes in the markets and the economy.
Passive investing is a central tenet of Boglehead investing. Not all Bogleheads are completely passive (some might not be even remotely passive), and all viewpoints are welcome and informative. But that after all these years you could still be amazed to find investors who don't adjust their portfolio based on valuations and other market and economic data is, well, rather amazing.

My own belief is that some folks are possibly knowledgeable enough to actively adjust their portfolios somewhat based on extreme valuations with a decent chance of benefiting from the effort. I don't count myself among them. I've come to the conclusion that my best chances for successful investing are based on capturing the market returns, not attempting to outperform the market. I have set targets for the three main asset classes and various sub-classes, and maintain those through all the market's gyrations. As the OP so succinctly noted earlier, the rebalancing process is where potential valuation extremes are addressed. While this passive approach is not universally followed here, I would venture to guess that it represents the approach used by a plurality, if not an outright majority, of the forum members.

Your efforts to beat the market are certainly common also. And as I said earlier, I wish you well. But you should also know that investors can succeed in reaching realistic goals by "merely" capturing the market returns. The best way to assure matching the market returns, before fees and expenses, is by not actively managing portfolio allocations — in other words, staying the course.
"Discipline matters more than allocation.” ─William Bernstein

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abuss368
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Re: REITS and Swedroe

Post by abuss368 » Mon Mar 12, 2018 7:55 pm

dbr wrote:
Mon Mar 12, 2018 8:48 am
abuss368 wrote:
Sun Mar 11, 2018 1:18 am
We have invested in REITS for a long time. First as individual stocks and now simply the Vanguard U.S. and International REIT Index Funds. This has worked out well and we will stay the course.
What does it mean to say something has "worked out well." I don't own any REITs beyond what might be in total stock market and that has also worked out well and we will also stay the course. So, what would we recommend to an investor asking if they should add a concentration to REITs? I would tell them to study the possible advantages and disadvantages and make up their own mind.
Hi dbr -

Essentially for us, REITs have performed as expected. They seem to zing when the overall investment portfolio zangs and provided the investment portfolio an investment with a higher yield.

Best.
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

dbr
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Re: REITS and Swedroe

Post by dbr » Mon Mar 12, 2018 8:53 pm

Thanks. Appreciate the details.

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Re: REITS and Swedroe

Post by NibbanaBanana » Mon Mar 12, 2018 10:12 pm

iceport wrote:
Sat Mar 10, 2018 8:29 pm

Larry said it's OK to HOLD REITs, but not to BUY REITs. And I'm saying there is no difference between holding REITs and buying REITs. This isn't a question of all-or-nothing. It's a question of logic. If an investor owns overvalued REITs, why not just sell them, and be in exactly the same position as the investor being advised not to buy them?
No. It's not the same at all. First, you don't know for sure what the future performance will be. So even though you've judged it to be overvalued, and are probably right, there is still a small chance that you are wrong. (But you can ignore this if you want and assume you know it's overvalued.) Second, if you've made any money, you have to pay taxes on that money. So that could be a significant cut off the top. Third, now you're sitting on cash that has to be invested. So you have another decision to make and another opportunity to screw up. And you have to make a pretty good decision just to make up for those taxes. I find this to be very difficult.

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Re: REITS and Swedroe

Post by iceport » Mon Mar 12, 2018 10:37 pm

NibbanaBanana wrote:
Mon Mar 12, 2018 10:12 pm
iceport wrote:
Sat Mar 10, 2018 8:29 pm

Larry said it's OK to HOLD REITs, but not to BUY REITs. And I'm saying there is no difference between holding REITs and buying REITs. This isn't a question of all-or-nothing. It's a question of logic. If an investor owns overvalued REITs, why not just sell them, and be in exactly the same position as the investor being advised not to buy them?
No. It's not the same at all. First, you don't know for sure what the future performance will be. So even though you've judged it to be overvalued, and are probably right, there is still a small chance that you are wrong. (But you can ignore this if you want and assume you know it's overvalued.) Second, if you've made any money, you have to pay taxes on that money. So that could be a significant cut off the top. Third, now you're sitting on cash that has to be invested. So you have another decision to make and another opportunity to screw up. And you have to make a pretty good decision just to make up for those taxes. I find this to be very difficult.
My comment wasn't intended as advice to sell REITs. I don't intend to act on Larry's current opinion of REIT valuations, and I don't advise others to do so, either. (My general advice is to set an appropriate asset allocation and stick to it, and stop assuming you know enough to beat the market.) I was simply pointing out the logical error in telling investors to keep your REITs if you already own them, but don't buy them if you don't.

Say there are two investors who are virtually identical — same age, risk tolerance, etc. They both have a 60/40 portfolio. One has a 6% allocation to REITs, the other doesn't. To the one that doesn't own REITs, Larry says not to buy them, valuations are too high, expected returns are too low. So why doesn't that same determination apply to the poor sap who followed Larry's original advice to buy them in the first place? It makes no sense.

The comment about capital gains taxes shouldn't really apply to the specific example of REITs, because they don't really belong in a taxable account in the first place.
"Discipline matters more than allocation.” ─William Bernstein

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Re: REITS and Swedroe

Post by nedsaid » Tue Mar 13, 2018 11:50 pm

iceport wrote:
Mon Mar 12, 2018 9:57 am
nedsaid, It would seem that I have somehow offended you; that was not my intention.
I do like to engage people in discussion but it just seems that you won't let this go. So Larry wrote a book and changed his mind on a couple of things. Collateralized Commodity Futures and REITs. Evidently, you think is a capital offense. I know this is a pet peeve but I can't think of a financial expert including Mr. Bogle who was 100% consistent on everything all the time. What I will say is that the truly great ones have a consistent philosophy and that whatever changes they make are fine tuning. I would put Warren Buffett and John Bogle in this camp.

Buffett went from being a deep value guy to more of a growth at a reasonable price guy. He started as a disciple of Benjamin Graham but got heavily influenced by his partner Charley Munger. What Buffett learned from Graham was the importance of quality. As Munger famously said, "It is better to buy a great company at a good price than to buy a good company at a great price."

Bogle started out with a basic philosophy when he wrote his paper at Princeton. He deviated from it during the go-go era of the 1960's. After getting fired from Wellington, Bogle then went back towards his original philosophy. But along the way, Bogle both said and did some pretty amazing things that seemed inconsistent with his philosophy.

So two of the big heroes of this forum, Buffett and Bogle, shifted their practices even more than whatever Mr. Swedroe did. If you are going to take Swedroe to task, you should take Buffett and Bogle to task as well. Bogle says some pretty amazing things in his interviews, he is not as doctrinaire as many people here believe that he is. Bogle said in a Morningstar interview that he went from 70% stocks down to 30% stocks in the spring of 2000. Valuations and Bogle's predictions of future expected returns of stocks and bonds were a big part of his decision.
One of my pet peeves is respected authors contradicting their own advice. Larry Swedroe's example with respect to REITs is, sadly, not rare at all. jailbert said it well:
jalbert wrote:
Sat Mar 10, 2018 8:17 pm
Lots of respected writers on investing change their recommendations from book to book while simultaneously touting the importance of staying the course.
Well, pretty much you will have to stop listening to anybody. Again, Mr. Bogle has shown some amazing inconsistencies over the years. Has Swedroe taken up a pseudonym and authored an article extolling the virtues of active management? Probably not but it is on the record that Mr. Bogle has.

I am not attacking Buffett or Bogle but just pointing out that they have both said and done rather surprising things. It doesn't mean that we should not listen to them.
That doesn't mean we must all remain willfully blind to the various contradictions.
Well, I guess it is okay to be selectively blind. Pretty much, what I am saying is don't expect perfection and 100% consistency from even our heroes. I guess Larry got stuck in your craw and you just can't let it go. As much as I like and admire Larry, I don't agree with him 100% either. But somehow changing one's mind on something doesn't seem like a capital offense to me.
As for your amazement by passive investing, that alone is amazing, considering you've been a member of the forum for over 5 years, and have over 9000 posts.

I get low cost investing, I get index funds, and I get buy, hold, and rebalance. What I will say is that whatever shifts I have made in my portfolio have been relatively cautious, made over time, and done with a lot of thought beforehand. I think you have misunderstood my position.
A fool and his money are good for business.

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Re: REITS and Swedroe

Post by grok87 » Wed Mar 14, 2018 7:22 am

According to this green street chart reits are currently trading at a 10.5% discount to the real estate they own.
https://www.greenstreetadvisors.com
Cheers,
Grok
Keep calm and Boglehead on. KCBO.

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