REIT's - like stocks or like bonds?

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Opera Lover
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REIT's - like stocks or like bonds?

Post by Opera Lover »

For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
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Re: REIT's - like stocks or like bonds?

Post by alex_686 »

Stocks.

They have about the same level of risk and return as common equities.

You want to group assets by similar characteristics. I would split REITs into a separate catalytic before mixing them with high yield or whatever. Like I said, risk and returns are stock like, however they have a low correlation with with stocks but a high correlation with each other.
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Re: REIT's - like stocks or like bonds?

Post by nisiprius »

Image

Is the behavior of the red line (REITS) more like the behavior of the blue line (Total Stock) or the yellow line (Total Bond)?
Last edited by nisiprius on Wed Jul 03, 2024 7:27 pm, edited 3 times in total.
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Re: REIT's - like stocks or like bonds?

Post by alex_686 »

nisiprius wrote: Wed Jul 03, 2024 2:58 pm They're not "like" stocks, they are stocks.
I am not sure this is helpful.

For example, prefered stocks are not "like" stocks, they are stocks. Yet nobody I knows would bucket them as stocks in a asset allocation because they don’t act like stocks.

You allocate assets by how they act, not by some technical loophole. Technically Mutual Funds and ETFs are stocks as well.

To extend, due to the tax code REITs are structured very differently then traditional equities and thus act very differently.
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Re: REIT's - like stocks or like bonds?

Post by arcticpineapplecorp. »

Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
it's interesting how vanguard wrote about them here saying they perform differently than stocks and bonds, where i see them perform more similarly to stocks than bonds.
This fund invests in real estate investment trusts—companies that purchase office buildings, hotels, and other real estate property. REITs have often performed differently than stocks and bonds, so this fund may offer some diversification to a portfolio already made up of stocks and bonds. The fund may distribute dividend income higher than other funds, but it is not without risk. One of the fund’s primary risks is its narrow scope, since it invests solely within the real estate industry and may be more volatile than more broadly diversified stock funds.

source: https://investor.vanguard.com/investmen ... file/vgslx
but under the portfolio composition part of that page (link above) it lists

Number of stocks 159

so the fund contains...stocks. 159 of them. Not bonds. Stocks. If you look under vbtlx portfolio composition it says "number of bonds". not stocks.

so i'd say based on that, reit index fund is STOCKS!!

Nobody answered your question about high yield bonds so i'll take a stab

high yield bonds are junk bonds. they're bonds not stocks. again, look at the portfolio composition, it says:

Number of bonds 905

So the high yield corporate bond index fund contains...BONDS!!

Thing is, because they're junk bonds (below investment grade), they are going to perform worse than bonds when the crap hits the fan or there are defaults in the bond market. Similar to nisiprius's post comparing total stock and reit index and total bond to see the higher volatility with total stock and reit as compared to total bond, look at a comparison in 2008 between total stock, high yield corporate bond index and total bond index:

Image

source: https://testfol.io/?d=eJytj8FKxEAMht8l5 ... %2FgQ57rIu

see how vweax did poorly, more poorly than high quality intermediate bonds like total bond index fund? It was volatile like total stock.

So to answer your question about vweax i'd compare a high yield bonds to stocks (in terms of performance) rather than bonds. Some may disagree, but the basic concept of risk and return holds true. high yield (junk) bonds are riskier than investment grade and should offer higher returns in exchange for taking higher risk. But then you would look at them differently than a bond aggregate fund because of the greater risk with junk bonds, no?

also look at the risk rating on the vanguard pages from 1-5, 1 being the lowest, 5 being the highest:
vtsax 4
vgslx 4
vweax 3
vbtlx 2

what do you think?
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alex_686
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Re: REIT's - like stocks or like bonds?

Post by alex_686 »

arcticpineapplecorp. wrote: Wed Jul 03, 2024 4:24 pm
Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
it's interesting how vanguard wrote about them here saying they perform differently than stocks and bonds, where i see them perform more similarly to stocks than bonds.
This fund invests in real estate investment trusts—companies that purchase office buildings, hotels, and other real estate property. REITs have often performed differently than stocks and bonds, so this fund may offer some diversification to a portfolio already made up of stocks and bonds. The fund may distribute dividend income higher than other funds, but it is not without risk. One of the fund’s primary risks is its narrow scope, since it invests solely within the real estate industry and may be more volatile than more broadly diversified stock funds.

source: https://investor.vanguard.com/investmen ... file/vgslx
but under the portfolio composition part of that page (link above) it lists

Number of stocks 159

so the fund contains...stocks. 159 of them. Not bonds. Stocks. If you look under vbtlx portfolio composition it says "number of bonds". not stocks.

so i'd say based on that, reit index fund is STOCKS!!

Nobody answered your question about high yield bonds so i'll take a stab

high yield bonds are junk bonds. they're bonds not stocks. again, look at the portfolio composition, it says:

Number of bonds 905

So the high yield corporate bond index fund contains...BONDS!!
This is s bit off.

The presentation of the Statement Of Investments is a regulated thing. If X is technically a “stock” it gets classified as a stock even if it doesn’t act like a stock.

Oddly, when I was writing up the SoI I would need reclassify and flag some bonds as stocks, some muni bonds as Treasuries, some US companies as foreign, and some foreign companies as US. This is because they were not functionally what they technically were.

On that, if you read the SoI carefully you will never find a stock classified as a REIT because for technical reasons, you can’t classify any stock trading today as a REIT. Sure, I can identify which stocks were REITs on 2023. However, I won’t be able to classify which stocks are REITs for 2024 until April 2025.

So the answer really can’t be found in the SoI.
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Re: REIT's - like stocks or like bonds?

Post by bombcar »

If you count REITs as stocks, you shouldn't invest in them, because just use the total stock market index.

If you count them as bonds, you shouldn't invest in them, because they're definitely not bonds.

So you should only invest in REITs if your IPR and AA call for a percentage in REITs. The purpose of investing in them is to try to get uncorrelated diversification so you can have a better result - so it should be 60% US stock, 25% international stock, 5% REIT, 10% bonds or something.
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Re: REIT's - like stocks or like bonds?

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Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
Real Estate Investment Fund (stocks)

High yield bond fund (bond fund (not a bond).
'
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Re: REIT's - like stocks or like bonds?

Post by nisiprius »

alex_686 wrote: Wed Jul 03, 2024 3:16 pm
nisiprius wrote: Wed Jul 03, 2024 2:58 pm They're not "like" stocks, they are stocks.
I am not sure this is helpful.

For example, prefered stocks are not "like" stocks, they are stocks. Yet nobody I knows would bucket them as stocks in a asset allocation because they don’t act like stocks.

You allocate assets by how they act, not by some technical loophole. Technically Mutual Funds and ETFs are stocks as well.

To extend, due to the tax code REITs are structured very differently then traditional equities and thus act very differently.
Point taken, post edited.
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Re: REIT's - like stocks or like bonds?

Post by grabiner »

bombcar wrote: Wed Jul 03, 2024 5:21 pm If you count REITs as stocks, you shouldn't invest in them, because just use the total stock market index.
My logic for overweighting REITs is that the total stock market weights real estate in proportion to its weight in the stock market, not its weight in the investment universe. Since a lot of real estate is privately held, you need to add some real estate investments to match the investment universe weight. You can do this by owning rental properties of your own, or indirectly through a REIT.
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Re: REIT's - like stocks or like bonds?

Post by grabiner »

Sandtrap wrote: Wed Jul 03, 2024 6:26 pm
Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
Real Estate Investment Fund (stocks)

High yield bond fund (bond fund (not a bond).
You can see how the funds perform in different types of markets. REITs gain and lose as much as the stock market when there are booms and crashes, so they should be treated as stocks. High-yield bonds behave similarly to a mixture of bonds and stocks; 50% stock and 50% bonds is typical, while Vanguard's fund is more similar to 1/3 stock and 2/3 bonds because it holds higher-quality junk bonds (mostly BB and B, not C-range).
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Re: REIT's - like stocks or like bonds?

Post by jebmke »

grabiner wrote: Wed Jul 03, 2024 7:29 pm
bombcar wrote: Wed Jul 03, 2024 5:21 pm If you count REITs as stocks, you shouldn't invest in them, because just use the total stock market index.
My logic for overweighting REITs is that the total stock market weights real estate in proportion to its weight in the stock market, not its weight in the investment universe. Since a lot of real estate is privately held, you need to add some real estate investments to match the investment universe weight. You can do this by owning rental properties of your own, or indirectly through a REIT.
A lot of equity and some debt is also privately held.
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Re: REIT's - like stocks or like bonds?

Post by Sandtrap »

grabiner wrote: Wed Jul 03, 2024 7:31 pm
Sandtrap wrote: Wed Jul 03, 2024 6:26 pm
Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
Real Estate Investment Fund (stocks)

High yield bond fund (bond fund (not a bond).
You can see how the funds perform in different types of markets. REITs gain and lose as much as the stock market when there are booms and crashes, so they should be treated as stocks. High-yield bonds behave similarly to a mixture of bonds and stocks; 50% stock and 50% bonds is typical, while Vanguard's fund is more similar to 1/3 stock and 2/3 bonds because it holds higher-quality junk bonds (mostly BB and B, not C-range).
While a brief foray into Vanguard Index REITS were very profitable and bought me 2 new cars, I did not like the increased volatility without the payback and indexing of VTSAX. So, gave up on them.

thanks
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Re: REIT's - like stocks or like bonds?

Post by nura »

alex_686 wrote: Wed Jul 03, 2024 1:18 pm They have about the same level of risk and return as common equities.
Of late, REITs have the same level of risk as equities and return as bonds.
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Re: REIT's - like stocks or like bonds?

Post by bombcar »

grabiner wrote: Wed Jul 03, 2024 7:29 pm My logic for overweighting REITs is that the total stock market weights real estate in proportion to its weight in the stock market, not its weight in the investment universe. Since a lot of real estate is privately held, you need to add some real estate investments to match the investment universe weight. You can do this by owning rental properties of your own, or indirectly through a REIT.
Which is fine - but then you should have your own personal AA percentage of REITs you want to hit.

Me? I had REITs at something like 10% and roughly was acting somewhat like bonds since Covid (now that’s back to being boring bonds because I realized I’m overweight - and own a rental).
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Re: REIT's - like stocks or like bonds?

Post by telemark »

REITs are like bonds in that they both react similarly to interest rates (and interest rate expectations), but like stocks in that they are, in fact, stocks. Some days one characteristic will predominate and some days, the other. All of which makes REIT an excellent diversifier, to my way of thinking. For rebalancing purposes I allocate a fixed percentage to REIT and rebalance to that.
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Re: REIT's - like stocks or like bonds?

Post by omedus82 »

Stocks - they're already included in the total stock market index funds at market weight.
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Re: REIT's - like stocks or like bonds?

Post by Oregano »

alex_686 wrote: Wed Jul 03, 2024 3:16 pm
nisiprius wrote: Wed Jul 03, 2024 2:58 pm They're not "like" stocks, they are stocks.
I am not sure this is helpful.

For example, prefered stocks are not "like" stocks, they are stocks. Yet nobody I knows would bucket them as stocks in a asset allocation because they don’t act like stocks.

You allocate assets by how they act, not by some technical loophole. Technically Mutual Funds and ETFs are stocks as well.

To extend, due to the tax code REITs are structured very differently then traditional equities and thus act very differently.
Uhhhh, no - it's the place in the capital structure that matters here, which is why REITs are just as volatile as the rest of the stock market. Common shares of REITs are equity securities - they are, indeed, just like other stocks. Sure, they have some unique tax characteristics, but they are still equities. Preferred stocks, on the other hand, are not equities in the sense that they generally pay a specified dividend and do not share in the profits of the company. REITs, for example, can have common stock, preferred stock, debt - just like any other company. The risk level is based on your placement in the capital structure of that company. Just being a REIT doesn't make it more or less risky, but within a given REIT (or any other company), the equity is the riskiest part.
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Re: REIT's - like stocks or like bonds?

Post by nedsaid »

nisiprius wrote: Wed Jul 03, 2024 2:58 pm Image

Is the behavior of the red line (REITS) more like the behavior of the blue line (Total Stock) or the yellow line (Total Bond)?
Nisiprius and his nifty charts are amazing, this one illustrates something that I caution investors about when discussing REITs, these darned things can be very volatile! I remember a day when the Vanguard REIT Index was down 10% one day and recovering the next. I think these are good investments but they have their bad points, volatility among them. REITs and the US Stock Market as a whole once had a relatively low correlation but in recent years have become more correlated.
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Re: REIT's - like stocks or like bonds?

Post by SimpleGift »

Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds?
One way to answer your question might be to look at the historical correlations between asset classes. The chart below shows the rolling 36-month correlations between REITs and stocks (blue) and bonds (orange):
Though the correlations have changed over time, it’s pretty clear that REITs have historically been much more closely correlated with stocks than bonds.
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Re: REIT's - like stocks or like bonds?

Post by Steven F »

it gets classified as a stock even if it doesn’t act like a stock.
People like to put simple labels on things. Reits are a stocks but the reason "they "don't act like stocks " is because they pay a higher yield than your typical index fund. The higher yeild encourages people to buy and hold that stock for a long time. However stocks that pay a low yield or have no yield are frequently purchased and sold. Low or no yield stocks are much more volatile stock price because there is little to nothing to encourage people to hold it long term.

Also in some ways high yield stocks are less risky than low yield stocks.

Another classification you see is high yield bonds being labeled as Junk bonds. People assume that if a company is offering a higher interest on a bond there is more risk. But many high yield bonds are from banks and credit card companies. As many of us know crieit card companies charge high interest on purchases. The banks and credit card companies ge the comet for these purchases by selling bonds By keeping the credit card interest high they can offer a bond at a higher interest rate than the government does.

If the credit card companies and banks managed their risks correctly the high yield bond should be reasonably safe. However if largely unknown company that has not made a profit is is selling bonds to build a new factory it would be a much higher risk or a junk bond.
bond.

Classify REITS as stocks and classify the bond fund as bonds.
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Re: REIT's - like stocks or like bonds?

Post by rossington »

Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
Hello Opera Lover,
For the purpose of rebalancing you should easily be able to tell which investments are down vs. up and take it from there when you decide to make the AA changes.
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Re: REIT's - like stocks or like bonds?

Post by Target2019 »

Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
I count VGSLX Vanguard REIT Fund shares in my equity allocation, and have a target of 5% for that fund.

When I had VWEHX Vanguard High-Yield Corporate Fund shares, those went to the fixed income calculation.
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Re: REIT's - like stocks or like bonds?

Post by ruralavalon »

Opera Lover wrote: Wed Jul 03, 2024 1:13 pm For the purpose of re-balancing our portfolio, should REIT's (in particular, VGSLX) be counted as stocks or as bonds? How about high-yield bonds (VWEAX)?
Vanguard Real Estate Index Admiral (VGSLX should be counted as a stock fund, because it is a stock fund.

I don't use any high-yield (junk) bond funds, and do not recommend them. Junk bond funds are too highly correlated to the stock market to be useful in diversifying a portfolio.
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Re: REIT's - like stocks or like bonds?

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Thank you all for your kind and generous advice!!
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