Should We Move into REITs Now?

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Shaoya
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Should We Move into REITs Now?

Post by Shaoya » Mon Aug 23, 2010 11:34 am

Rick Ferri’s “All About Asset Allocation – 2nd Edition,” which came out this summer (Nice job, Rick), has really got me thinking about diversification beyond equities/bonds to lower risk in our long-term portfolio. Specifically, I’m interested in REITs because of their lower correlation with bonds and equities.

Given our situation (below), does it make sense to move 5% of our investments to Vanguard REIT Index (VGSIX) (0.26%), within a tax-advantaged space, probably from Vanguard TIPS (VIPSX) (0.25%) in the IRA?

If so, is now a good time to do this?


[I fully understood the folly of market timing; I DCA monthly. That said, I don’t know if making this one-time shift into REITs now is prudent or not given market conditions.]

Debt
Mortgage –30 year fixed at 4.75% (refi’d May 2009)
Credit card debt – none
Student – 1.6% fixed @ $130 a month.
Car – no debt
Emergency Fund – not included below

Tax Filing Status

Married Filing Jointly – 15% Fed in 2009; 9% Oregon (2009)
Age
Hers – 35
His – 37
Son (DOB:5-7-08); Daughter (DOB: 5-27-10)


Stable jobs in local/state government with an annual income of ~$100K. Expect this to increase incrementally – not dramatically - relative to inflation later in our careers. Intend to stay in our current house/city indefinitely (“…’til they cart me out in a box”).

Asset Allocation

Current Ratio
Stock/Bond/Real Estate: 68.5/31.5/0

Ratio Being Considered
Stock/Bond/Real Estate: 68.5/26.5/5.0

Domestic/Foreign Stocks: 74/26

Current Portfolio
% Taxable
28.8 Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.08%)
8.8 Vanguard Total Stock Mkt Idx - Inv (VTSMX) (0.18%)
4.8 Vanguard PRIMECAP (VPMCX) (0.50)
14.3 Total Int'l Stock Index (VGTSX) (0.34%)
8.4 Vanguard Limited-Term Tax Exempt (VMLTX) (0.20%)

Tax-advantaged
IRA
11.4 Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roth IRA
3.4 Vanguard FTSE All-World Except US (VFWIX) (0.40%)
5.4 Windsor II (VWNFX) (0.39%)
3.0 Vanguard Total Stock Mkt Idx Inv
1.9 Vanguard Short-Term Bond Index (VFSTX) (0.24%)

Her 457
6.7 Vanguard Total Bond Market Index Fund – Institutional Shares
(VBTIX) (0.07%)

His 457
3.1 Intermediate Bond Option (0.09%)
100%
Last edited by Shaoya on Mon Aug 23, 2010 4:02 pm, edited 2 times in total.

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Opponent Process
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Post by Opponent Process » Mon Aug 23, 2010 11:42 am

maybe. I don't know if there's really a low (non-significant) correlation with equities. thought it was around 0.6-0.8. there's a low correlation with bonds, but maybe just similar to stocks vs. bonds. I may be missing something, and Rick could give a better answer.

Vanguard is also coming out with an international REIT fund soon if you're interested. might be a better diversifier.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37

Valuethinker
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Re: Should We Move into REITs Now?

Post by Valuethinker » Mon Aug 23, 2010 12:06 pm

Shaoya wrote:Rick Ferri’s “All About Asset Allocation – 2nd Edition,” which came out this summer (Nice job, Rick), has really got me thinking about diversification beyond equities/bonds to lower risk in our long-term portfolio. Specifically, I’m interested in REITs because of their lower correlation with bonds and equities.



Take a look at the REIT chart (up and down) from 2000-2010 and especially the last 3 years.

Those are really big swings. I would reckon a REIT index fund might be more volatile than the stock market as a whole.

The reason being the underlying leverage of the REIT companies themselves. REIT doesn't behave so much like commercial real estate as like a leveraged small cap equity. And I think therefore it is not a good diversifier.

So I question the diversification virtues. You are buying what is, in essence, a small cap financial stock.

I would say market timing. REITs have rallied hugely. When they are trading at quite significant discounts to NAV, and/or when insiders are buying, I get interested.

Right now I don't think that is the case.

So I'm not interested. Not trading a very safe asset that I know is indexed to inflation (VIPSX) against one that does have inflation protection built in, but all of that financial leverage on top of it.

That I am afraid is a highly non Boglehead view.

Valuethinker
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Re: Should We Move into REITs Now?

Post by Valuethinker » Mon Aug 23, 2010 12:07 pm

Shaoya wrote:Rick Ferri’s “All About Asset Allocation – 2nd Edition,” which came out this summer (Nice job, Rick), has really got me thinking about diversification beyond equities/bonds to lower risk in our long-term portfolio. Specifically, I’m interested in REITs because of their lower correlation with bonds and equities.

Given our situation (below), does it make sense to move 5% of our investments to Vanguard REIT Index (VGSIX) (0.26%), within a tax-advantaged space, probably from Vanguard TIPS (VIPSX) (0.25%) in the IRA?

If so, is now a good time to do this?


[I fully understood the folly of market timing; I DCA monthly. That said, I don’t know if making this one-time shift into REITs now is prudent or not given market conditions.]

Debt
Mortgage –30 year fixed at 4.75% (refi’d May 2009)
Credit card debt – none
Student – 1.6% fixed @ $130 a month.
Car – no debt
Emergency Fund – not included below

Tax Filing Status

Married Filing Jointly – 15% Fed in 2009; 9% Oregon (2009)
Age
Hers – 35
His – 37
Son (DOB:5-7-08); Daughter (DOB: 5-27-10)


Stable jobs in local/state government with an annual income of ~$100K. Expect this to increase incrementally – not dramatically - relative to inflation later in our careers. Intend to stay in our current house/city indefinitely (“…’til they cart me out in a box”).

Asset Allocation

Current Ratio Considering
Stock/Bond/Real Estate: 68.5/31.5/0 68.5/26.5/5.0

Domestic/Foreign Stocks: 74/26

Current Portfolio
% Taxable
28.8 Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.08%)
8.8 Vanguard Total Stock Mkt Idx - Inv (VTSMX) (0.18%)
4.8 Vanguard PRIMECAP (VPMCX) (0.50)
14.3 Total Int'l Stock Index (VGTSX) (0.34%)
8.4 Vanguard Limited-Term Tax Exempt (VMLTX) (0.20%)

Tax-advantaged
IRA
11.4 Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roth IRA
3.4 Vanguard FTSE All-World Except US (VFWIX) (0.40%)
5.4 Windsor II (VWNFX) (0.39%)
3.0 Vanguard Total Stock Mkt Idx Inv
1.9 Vanguard Short-Term Bond Index (VFSTX) (0.24%)

Her 457
6.7 Vanguard Total Bond Market Index Fund – Institutional Shares
(VBTIX) (0.07%)

His 457
3.1 Intermediate Bond Option (0.09%)
100%
I should add that REITs are probably alright on a very long view (over 10 years).

Just that the last 3 years have made me reconsider whether they really add exposure to commercial property or rather exposure to financial leverage.

If you own your own home you have a lot of property exposure, inherently.

BogleDave
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Re: Should We Move into REITs Now?

Post by BogleDave » Mon Aug 23, 2010 7:54 pm

Valuethinker wrote:If you own your own home you have a lot of property exposure, inherently.
Not to hijack this thread, but this raises the question I can't seem to get a straight answer to no matter what I read. I often hear that those of us who own our homes already have investments in real estate but to what extent is this a fair substitute (if at all) for the REIT component of our portfolio? Swensen says 20% of our assets should be in REITs but let's say I've decided on 10%. But the equity in my house by itself if considered part of my portfolio would constitute roughly 25% of my assets. Does that mean I should own no REITs whatsoever or something less than 10% or should I still own 10% REITs because of the distinction between commercial and residential real estate? I'm guessing there's no easy answer to this but I welcome everyone's thoughts.

bradshaw1965
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Post by bradshaw1965 » Mon Aug 23, 2010 8:12 pm

I'm a stay the course kind of guy. I've never really thought much about asset class volatility , but I've got to admit to being stunned by the REIT moves during the financial crisis. The relatively small percentage of REITS in my portfolio allowed me to stay the course, but if I had to do it all over again I don't know that I'd have a REIT allocation.

Jacobkg
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Post by Jacobkg » Mon Aug 23, 2010 8:31 pm

If it makes you feel any better, I'm about to quintiple my position in the Vanguard REIT fund. I had a goal of a 10% allocation and currently only have 2%. As I just changed jobs, I can now roll over my 401K to Vanguard and can finally get up to my desired allocation. Obviously I wish that VGSIX was still at 8 when I bought the first bit instead of at 16 like now but thems the breaks.

Valdeselad
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Post by Valdeselad » Mon Aug 23, 2010 8:39 pm

Opponent Process wrote:Vanguard is also coming out with an international REIT fund soon if you're interested. might be a better diversifier.
Do you have any other details on this?

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DA
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Post by DA » Mon Aug 23, 2010 8:52 pm

Valdeselad wrote:
Opponent Process wrote:Vanguard is also coming out with an international REIT fund soon if you're interested. might be a better diversifier.
Do you have any other details on this?
Vanguard is waiting on approval from the SEC. More details here:

https://personal.vanguard.com/us/insigh ... t-06242010

raywax
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Location: Phoenix, AZ

Post by raywax » Mon Aug 23, 2010 8:56 pm

Jacobkg wrote:If it makes you feel any better, I'm about to quintiple my position in the Vanguard REIT fund. I had a goal of a 10% allocation and currently only have 2%. As I just changed jobs, I can now roll over my 401K to Vanguard and can finally get up to my desired allocation. Obviously I wish that VGSIX was still at 8 when I bought the first bit instead of at 16 like now but thems the breaks.
I also have a 10% allocation goal for REITS and I am close to it but mine are via DFA funds. I intend to stick with the 10% goal; half domestic and half international.

Ray

Jacobkg
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Post by Jacobkg » Mon Aug 23, 2010 9:02 pm

If Vanguard offered International REIT then I might consider switching to 50/50 domestic/international. It would depend on the expenses and tax issues.

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camper
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Re: Should We Move into REITs Now?

Post by camper » Mon Aug 23, 2010 9:03 pm

BogleDave wrote:
Valuethinker wrote:If you own your own home you have a lot of property exposure, inherently.
Not to hijack this thread, but this raises the question I can't seem to get a straight answer to no matter what I read. I often hear that those of us who own our homes already have investments in real estate but to what extent is this a fair substitute (if at all) for the REIT component of our portfolio? Swensen says 20% of our assets should be in REITs but let's say I've decided on 10%. But the equity in my house by itself if considered part of my portfolio would constitute roughly 25% of my assets. Does that mean I should own no REITs whatsoever or something less than 10% or should I still own 10% REITs because of the distinction between commercial and residential real estate? I'm guessing there's no easy answer to this but I welcome everyone's thoughts.
Kinda hard to rebalance the equity in your house. I would go with the a REIT fund. FYI, I own shares of Vanguard REIT fund VGSIX.

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Adrian Nenu
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Post by Adrian Nenu » Mon Aug 23, 2010 9:10 pm

Morningstar's 3 year standard deviation:

Total Stock Market index - 21

Emerging Markets index - 34

Small Cap Value index - 28

REIT Index - 40


This gives you some idea of how rough the ride could be...

Of course the REIT index returned nearly 10% for the last decade compared to zero for the Total Stock Market index. Will it happen over the next decade? Probably not but nobody really knows. When we don't know, we diversify. The addition of REITs clearly benefits diversification.

Adrian
anenu@tampabay.rr.com

DaveS
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Post by DaveS » Mon Aug 23, 2010 9:15 pm

REITS hold commercial real estate. There is not a lot of correlation between the stocks companies owning apartments, offices, mini storages, and malls and individual home equity. For that reason you should not count your home equity toward your REIT allocation. They just are not the same.

The more difficult question is do you hold REITS given the precarious state of commercial real estate. On that question I pass. Dave

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Opponent Process
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Post by Opponent Process » Mon Aug 23, 2010 9:20 pm

if you have the time to rebalance daily, REITs could be very useful.
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JTcheek
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Post by JTcheek » Tue Aug 24, 2010 7:18 am

With bond yields this low, I would feel very comfortable selling some bonds and buying REITS. As other posters have noted, you will need to rebalance periodically. Also, REITs are not very tax efficient, so you'll want to hold them in a tax advantaged account if possible.

fishndoc
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Post by fishndoc » Tue Aug 24, 2010 9:33 am

REITS seem to be a poor-man's surrogate for actually owning real estate - with behavior that is a combination of commercial real estate and equities.

It seems to me that if you actually own real estate (I don't see how one's home really counts here), or if you significantly tilt your portfolio to small/mid-value, then you don't need REITS as a separate asset class (if it really IS a separate class).
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle

retiredjg
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Post by retiredjg » Tue Aug 24, 2010 11:46 am

You are actually asking 3 questions.

1) Should I hold extra REIT?
2) If so, should I change my stock to bond ratio to get it?
3) Is now a good time to buy REIT?

Here are my comments.

1) Opinions vary. Rick likes REIT. Many people here hold REIT (I do). Many probably do not. REIT is already included in your total stock market so it's not like you don't have any. Everybody is not going to agree on this one, so you'll just have to decide what feels right to you. If you can't decide, wait 6 months and see if an answer manifests itself.

2) No. You should not change your stock to bond ratio to get REIT. Your stock to bond ratio is the first decision to make and it trumps all the other decisions. VGSIX is a stock fund and if you add it, you should count it as stocks. Sell stocks in your Roth IRA and put the REIT there.

3) You should buy stuff when you want it/need it. "Should I buy it now?" is a question to avoid unless there is some compelling reason to wait. I suspect this is not common.

I'm curious why you hold both
  • 28.8 Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.08%)
    8.8 Vanguard Total Stock Mkt Idx - Inv (VTSMX) (0.18%)
I was under the impression that Vanguard automatically switches Investor shares to Admiral shares when the conditions are met.

Also wondering why you are holding bonds in your taxable account when there is plenty of space in your tax-advantaged space, but it seems like we discussed that before, so maybe you just don't want to make the change.

Valuethinker
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Re: Should We Move into REITs Now?

Post by Valuethinker » Tue Aug 24, 2010 12:43 pm

BogleDave wrote:
Valuethinker wrote:If you own your own home you have a lot of property exposure, inherently.
Not to hijack this thread, but this raises the question I can't seem to get a straight answer to no matter what I read. I often hear that those of us who own our homes already have investments in real estate but to what extent is this a fair substitute (if at all) for the REIT component of our portfolio? Swensen says 20% of our assets should be in REITs but let's say I've decided on 10%. But the equity in my house by itself if considered part of my portfolio would constitute roughly 25% of my assets. Does that mean I should own no REITs whatsoever or something less than 10% or should I still own 10% REITs because of the distinction between commercial and residential real estate? I'm guessing there's no easy answer to this but I welcome everyone's thoughts.
Dave

I'm not sure if anyone has done the studies. I vaguely remember in previous threads that someone has (someone in Boston but BU? MIT?).

There is surely a correlation between residential real estate and commercial, as they are both driven by the strength of the economy HOWEVER

- a home is an individual risk (high specific risk) so you cannot really compare to a REIT index which is massively diversified

My own take on this is this. 20% REITs, a number Swensen and Malkiel came up with, was before the 2008-09 volatility showed us that there is a very high level of volatility in returns of REITS. Too high for many investors I would wager.

I don't think they have revised their views but I think they should.

(if US CPI were steadily above 4%, say, then one would change one's tune-- RE has a higher correlation with inflation than do equities generally).

Intuitively there has to be a correlation between residential property (that you live in) and commercial RE. And so I would tend to aim away from a high REIT weighting because of that.

10% is certainly a feasible level. Personally I am happy (just assume for a minute I am a US investor) with the c. 2.5% weighting contained in a total market fund. Any small cap value tilt would add to that.

But more than 10% strikes me in excessive and risky. Go back and look at those volatilities: they are extreme.

(BTW remember to lonly look at your home *equity* when considering portfolio, not gross value)

If you have access to TIAA RE annuity then the issue is slightly different-- even stripping out accounting effects, that really does show lower volatility than stocks.

But that's a very special case, AFAIK the only institutional quality RE fund that US individual investors can invest in (I don't count the sort of ripoff vehicles Swensen dissects).

I think Swensen made a mistake. He can invest in the best of class institutional RE funds (which will show the sort of ready and steady returns that commercial RE shows). But we cannot: we have to invest in quoted REITs that have financial leverage loaded on top: and therefore high risk and volatility.

He has mapped an appropriate recommendation to a unversity endowment onto individuals, without thinking through all of the issues in REITs (and to be fair, without the data that 2008-09 has thrown up).

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woof755
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Post by woof755 » Tue Aug 24, 2010 1:12 pm

IIRC, small cap value index fund has around 11% REITs. I'm considering that my exposure.
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Opponent Process
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Post by Opponent Process » Tue Aug 24, 2010 1:20 pm

woof755 wrote:IIRC, small cap value index fund has around 11% REITs. I'm considering that my exposure.
I'm pretty sure SCV performance has been virtually indistinguishable from REIT performance over the long-term, maybe superior, with high correlations. REITs would appear to be a subsector of SCV/MCV (although they are at the moment a bit growthier). I'd imagine if you took any 100 random stocks from SCV/MCV over the past 30 years, you'd approximate REIT returns. basically same returns with a little more volatility because you are selecting a subsector of SCV/MCV.

I'm not saying this as some kind of anti-REIT rant, I'd just like to see data if this isn't the case. Rick seems to just prefer REITs over SCV, to better complete a market portfolio, which I think is fine if this is the OP's aim.
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Adrian Nenu
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Post by Adrian Nenu » Tue Aug 24, 2010 1:42 pm

REIT index potential risk of loss:

(1-SD)^3 = .595 x .595 x .595 = .2106 or 78.94% loss.


Adrian
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Shaoya
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Post by Shaoya » Thu Aug 26, 2010 11:58 pm

Thank you all for your insights; they were all appreciated & give food for thought.

Retiredjg - as you have in the past, you've restated my queries perfectly. I appreciate your suggestion to keep a REIT stake in the stock allocation. I knew we had some REIT exposure in the VTSAX & VTSMX funds, so I'm still on the fence as to getting into
retiredjg wrote: I'm curious why you hold both

28.8 Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.08%)
8.8 Vanguard Total Stock Mkt Idx - Inv (VTSMX) (0.18%)


It's because they are in two different accounts (his & hers). Yes, VG makes that shift to Admiral when their criteria is met.
retiredjg wrote: Also wondering why you are holding bonds in your taxable account when there is plenty of space in your tax-advantaged space, but it seems like we discussed that before, so maybe you just don't want to make the change.
This muni is federal tax exempt. I felt the state tax bite was outweighed by being able to immediately pick up VMLTX (by exchanging it with VPMCX in our taxable). Frankly, it would take a long time to DCA that amount, from our paychecks, into our tax-advantaged space. Moreover, I don't think our 457 plans have muni choices.
retiredjg wrote:
...when there is plenty of space in your tax-advantaged space
I'm not sure I fully understand what you mean by this. If possible, please explain further, retiredjg.

Again, thank you all for your help! - Shaoya
Last edited by Shaoya on Sun Aug 29, 2010 12:31 am, edited 1 time in total.

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Post by retiredjg » Fri Aug 27, 2010 10:40 am

Shaoya wrote:It's because they are in two different accounts (his & hers). Yes, VG makes that shift to Admiral when their criteria is met.
It was my understanding that meeting the criteria was per family - so if one is Admiral, the other would be too. However, this is only something I think I've read here and it may or may not apply to your situation. But you might call Vanguard and ask.
retiredjg wrote:...when there is plenty of space in your tax-advantaged space
I'm not sure I fully understand what you mean by this. If possible, please explain further, retiredjg.
In general, holding taxable bond funds in your tax-advantaged space pays you more than holding muni bond funds in your taxable space. So, when possible, it is suggested to hold all your bonds in the tax-advantaged space.

If all of your bonds do not fit into the tax-advantaged space, some have to go into taxable. Then you have to decide whether to use taxable bonds there or muni bonds. For low tax brackets, taxable bonds usually pay more, even after taxes. For higher tax brackets, the best choice is muni bond funds. To determine which, there are bond calculators available on the internet. However, this does not apply to you because you do have room to hold all the bonds in tax-advantaged.

All of what I said above is "in general". There may be times and situations where something else is true. But to keep from switching back and forth, you might consider holding all your bonds in your tax-advantaged space.

It is true there are no munis offered in your 457 because munis are only appropriate for taxable accounts.

You are paying a high state tax on the Limited Term Tax Exempt bond fund. Since you are in a 15% federal tax bracket, you can sell it this year without paying capital gains taxes (if there is a long term gain). If you can sell at a loss, you can take the loss off your taxes.

There is no need to DCA into bonds. Sell bonds and buy stocks in taxable and immediately sell stocks and buy bonds in tax-advantaged. This would be nothing more than changing locations.
....so I'm still on the fence as to getting into (REIT)
Not a big deal at all. This is a small decision and not nearly as important as your other decisions such as the stock to bond ratio.

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Shaoya
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Post by Shaoya » Sun Aug 29, 2010 12:30 am

Okay, I can see this is a needed education for me.
retiredjg wrote:However, this does not apply to you because you do have room to hold all the bonds in tax-advantaged
.

How is it that you can tell we have room?

As I understand it, in 2010, we each can defer/contribute $16500 in our jobs' 457 plans & $5000 in our Roths. We're already doing both; I know we'll max out the Roths & get close on our 457's. [As stated in previous posts, neither of us get any sort of employer match on our 457's.]

Perhaps I don't correctly understand what "having room in tax-advantaged" means.

Are you suggesting that we exchange the 8.4% of VMLTX (Limited-Term Tax Exempt) in taxable for VTSAX (Total Stock Mkt Idx - Admiral), and simultaneously, exchange the 5.4% VWNFX (Windsor II)
3.0% VTSMX (Total Stock Mkt Idx - Inv) for a bond fund in our tax-advantaged?

[Since, as you point out, we're in a low tax bracket, what other VG bond fund, in place of VMLTX, would you suggest? And if not VTSMX for exchanging in taxable, what then?]

I may be belaboring the point, but I want to make sure it's crystal clear to me before making a fairly big move?

Finally,
retiredjg wrote: This is a small decision and not nearly as important as your other decisions such as the stock to bond ratio.
Based on the information I've supplied, how's our stock to bond ratio look to you?
Shaoya wrote:Stock/Bond: 68.5/31.5
Is it appropriate?

Thanks, again, for your help. - Shaoya

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Post by Outer Marker » Sun Aug 29, 2010 8:45 am

If it were me, I'd add a small cap value tilt before adding reits. SCV contains a good smattering of reits in any event, so you'll pick up more of that asset class. And it is more tax effecient so should be okay in taxable. Move all bonds into tax advantaged accounts. I'd bump up my bond allocation a bit closer to "age in bonds" So, the reorganized (and simplifed) portfolio would look something like this:

Taxable
37 Vanguard Total Stock Mkt Idx
18 Total Int'l Stock Index (VGTSX)
10 Vanguard Small Cap Value

Tax-advantaged
IRA
11.4 Vanguard Inflation-Protect Sec (VIPSX)

Roth IRA
13.7 Vanguard Total Bond

Her 457
6.7 Vanguard Total Bond Market Index Fund – Institutional Shares
(VBTIX)

His 457
3.1 Intermediate Bond Option


That's 65% equity, 35% bond, with 28% international.

If you can afford it, I'd refinance to a 15 year mortgage which can be had now on a no cost refi basis at 3.75% -- a full point less than what you're paying.

Cheers,
OM

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Re: Should We Move into REITs Now?

Post by YDNAL » Sun Aug 29, 2010 8:56 am

Shaoya wrote:Should We Move into REITs Now?
Stock Market Sectors

Cyclical:
1.Capital Goods
2.Energy
3.Technology
4.Health care
5.Communications
6.Transportation
7.Basic materials
8.Consumer cyclical
9.Financial

Defensive:
1.Utilities
2.Consumer staples

REITs are *companies* in one sector just like Pfizer, Merck, etc. are *companies* in another. Of course, different tax structure, products/services; but companies in a sector nonetheless.

Should you allocate 10% (or whatever) of your portfolioto independently in the Healthcare sector of the market? How about in several specific sectors?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Post by retiredjg » Sun Aug 29, 2010 9:51 am

Shaoya wrote:How is it that you can tell we have room?
Because you are holding things in tax-advantaged that can be held in taxable. See below

Taxable 65.1%
28.8 Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.08%)
8.8 Vanguard Total Stock Mkt Idx - Inv (VTSMX) (0.18%)
4.8 Vanguard PRIMECAP (VPMCX) (0.50)
14.3 Total Int'l Stock Index (VGTSX) (0.34%)
8.4 Vanguard Limited-Term Tax Exempt (VMLTX) (0.20%)

IRA 11.4%
11.4 Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roth IRA 13.7%
3.4 Vanguard FTSE All-World Except US (VFWIX) (0.40%) <---could move to taxable
5.4 Windsor II (VWNFX) (0.39%) <---is taking up space that could hold bonds
3.0 Vanguard Total Stock Mkt Idx Inv <--- could move to taxable
1.9 Vanguard Short-Term Bond Index (VFSTX) (0.24%)

Her 457 6.7%
6.7 Vanguard Total Bond Market Index Fund – Institutional Shares (VBTIX) (0.07%)

His 457 3.1%
3.1 Intermediate Bond Option (0.09%)

But, before you go selling anything, realize that your contributions to the 457 accounts (lots of money going to bonds) will fix this in the next several months without you doing any switching back and forth. In fact, eventually, you will need to find some stock funds to hold in one or both 457 accounts.
Perhaps I don't correctly understand what "having room in tax-advantaged" means.
You could be right. What it means is...since your tax-advantaged space is 34.9% of your portfolio, you should be able to hold all 31.5% of your bonds there.
Are you suggesting that we exchange the 8.4% of VMLTX (Limited-Term Tax Exempt) in taxable for VTSAX (Total Stock Mkt Idx - Admiral), and simultaneously, exchange the 5.4% VWNFX (Windsor II)
3.0% VTSMX (Total Stock Mkt Idx - Inv) for a bond fund in our tax-advantaged?
You could make exchanges now, or you could just wait and let your new contributions (which will buy a lot of bonds in the 457 accounts) take care of it. If you have an opportunity to sell the VMLTX now without a short term capital gain, it might be good to go ahead and do it this year. This is because next year, any type of capital gain you have by selling it will be taxed (tax laws change after this year).
Since, as you point out, we're in a low tax bracket, what other VG bond fund, in place of VMLTX, would you suggest?
I'm not sure because I have not run any bond fund calculation on it. If you had a low state tax, it would be easy to just eyeball it. Since your state tax is high, I don't know the answer. The best thing to do is move the bonds out of taxable which can easily happen with your new contributions.
I may be belaboring the point, but I want to make sure it's crystal clear to me before making a fairly big move?
No problem.

The other thing you need to consider is whether you want to continue holding the Primecap in taxable. It was tax-efficient this year, but overall, this is not the best choice to hold in a taxable account. I don't think you need it at all since is just overlaps with your total stock market. But if you want to hold it, you should consider moving it to one of the IRAs. Again, this year a short term capital gain would be taxed (but at 15%, that could not be much) while a long term capital gain would carry no tax. A capital loss would be something you could take off your taxes. So again, if moving it is something you want to do, this year might be your best opportunity.

Please understand that holding 8% of tax-exempt bonds in taxable is not a huge deal. And holding the small amount of Primecap in taxable is hot a huge deal either. These things simply make your portfolio a little less efficient than it could be. Fixing these small problems will make your portfolio a little better. Adding the REIT may or may not make your portfolio a little better.
Based on the information I've supplied, how's our stock to bond ratio look to you? Stock/Bond: 68.5/31.5 Is it appropriate?
Yes. It is within the range I consider reasonable.

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Post by pkcrafter » Sun Aug 29, 2010 10:00 am

BogleDave,

It is difficult to get an answer to the question of considering your home as part of a REIT investment. Here is my straight answer. Your home is your home and not an investable asset. REITs are stocks of companies that invest in commercial RE and how much you hold should not be influenced at all by your home. Other opinions may differ, but I will stick with Taylor Larimore's rule; keep it simple--don't create complexity.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Post by jimkinny » Sun Aug 29, 2010 11:14 am

I really like the answers you have gotten. IMO the answers from Adrian Nenu and reitredjg are particularly compelling and should be read and understood before you make any changes.

Jim

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nisiprius
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Re: Should We Move into REITs Now?

Post by nisiprius » Sun Aug 29, 2010 11:37 am

BogleDave wrote:
Valuethinker wrote:If you own your own home you have a lot of property exposure, inherently.
Not to hijack this thread, but this raises the question I can't seem to get a straight answer to no matter what I read. I often hear that those of us who own our homes already have investments in real estate but to what extent is this a fair substitute (if at all) for the REIT component of our portfolio? Swensen says 20% of our assets should be in REITs but let's say I've decided on 10%. But the equity in my house by itself if considered part of my portfolio would constitute roughly 25% of my assets. Does that mean I should own no REITs whatsoever or something less than 10% or should I still own 10% REITs because of the distinction between commercial and residential real estate? I'm guessing there's no easy answer to this but I welcome everyone's thoughts.
Strictly my poorly-informed $0.02 but I think it depends entirely on how you personally view your house. I'd argue that for most people, a house isn't really part of your financial picture at all, any more than your spouse or your musical talent or your health is. It's not an investment, it's shelter.

Everything has financial consequences, but that does not make everything financial or turn everything into an investment asset.

In order to qualify as an investment, it seems to me, you need to be able to invest more in it, sell off portions of it, and rebalance it, all of which are hard to do with a single house, especially if you are living in it. It also seems to me that in general, in order to qualify as an investment, it must be something which carries no emotional value on it other than its dollar value on the market. To put it another way, if your plans are to live in it for a while--i.e. your financial plan does not call for selling it in some well-defined time frame in the foreseeable future--then, because you are not going to market it, it is not a marketable asset to you, even if the exact same house might be a marketable asset to someone who makes a business out of buying, improving, and reselling it.

The market value is relevant only to the extent that you are planning to sell it.

If there is a 20% chance you will sell the house during the next ten years due to circumstances you do not foresee, then the market value of the house is 20% relevant.

This is, of course, heterodox thinking, but it seems self-evident to me.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by BogleDave » Sun Aug 29, 2010 11:42 am

pkcrafter wrote:BogleDave,

It is difficult to get an answer to the question of considering your home as part of a REIT investment. Here is my straight answer. Your home is your home and not an investable asset. REITs are stocks of companies that invest in commercial RE and how much you hold should not be influenced at all by your home. Other opinions may differ, but I will stick with Taylor Larimore's rule; keep it simple--don't create complexity.


Paul
Paul, thanks for you input. I don't necessarily disagree with you, but I would note that this seems to be a subject about which even the experts don't agree. For example, take a look at the different positions taken by different experts in the very same book (The Elements of Investing):

Swensen in the Foreword: : “I view home ownership more as a consumption good and less as an investment asset.”

Malkiel and Ellis on p. 103: : “We believe you should focus on three simple investment categories: (1) common stocks …; (2) bonds…; and (3) real estate, which can best be acquired through your ownership of your single-family house.” (emphasis added)

We know from his own book that Swensen is an advocate of a separate REIT stake, and I thought Malkiel and Ellis felt similarly, but it sure looks like their latest feeling on this is that while real estate in an important part of one's portfolio, the best way to accomplish this is through home ownership rather than REITs.

It's hard to know what the best approach is when the opinions on this particular issue seem to be so different.

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Post by dbr » Sun Aug 29, 2010 11:47 am

It is self-evident that a single residence is not similar to an investment in a fund of REITS.

However, a single residence certainly is a financial asset. A problem is that it lacks the divisibility and liquidity the usual portfolio of stocks and bonds has. This forum does not talk much about the intermanagement of liquid and non-liquid assets.

Certainly, however, retirees seriously contemplate eventual liquidation of residences or the inclusion of residences in what will be passed on to heirs. It is also possible to capitalize residences by borrowing against the equity and a standard computation for those holding mortgages is the assessment of the mortgage as a "negative bond" and discussion of the issue of when and how fast to pay off that debt.

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Re: Should We Move into REITs Now?

Post by stratton » Sun Aug 29, 2010 5:00 pm

nisiprius wrote:
BogleDave wrote:
Valuethinker wrote:If you own your own home you have a lot of property exposure, inherently.
Not to hijack this thread, but this raises the question I can't seem to get a straight answer to no matter what I read. I often hear that those of us who own our homes already have investments in real estate but to what extent is this a fair substitute (if at all) for the REIT component of our portfolio? Swensen says 20% of our assets should be in REITs but let's say I've decided on 10%. But the equity in my house by itself if considered part of my portfolio would constitute roughly 25% of my assets. Does that mean I should own no REITs whatsoever or something less than 10% or should I still own 10% REITs because of the distinction between commercial and residential real estate? I'm guessing there's no easy answer to this but I welcome everyone's thoughts.
Strictly my poorly-informed $0.02 but I think it depends entirely on how you personally view your house. I'd argue that for most people, a house isn't really part of your financial picture at all, any more than your spouse or your musical talent or your health is. It's not an investment, it's shelter.

Everything has financial consequences, but that does not make everything financial or turn everything into an investment asset.
I found a couple of articles:

Investing in Real Estate: REIT’s and Your Home by Geoff Considine from 2007.
A recent study by Fidelity (link later in this paper) warns that people need to be careful
about being too heavily invested in their homes:

…home equity in the form of land, bedrooms or other improvements beyond those a
family needs is less an investment choice than a matter of lifestyle, and it carries a
substantial long-term cost. Instead of “buying bigger” and thinking of that as an
“investment”, anyone interested in assembling a portfolio that has a chance of producing
lifelong income, will want to diversify — strongly —beyond their home to include a wellbalanced
portfolio of stocks
.
...
My summary on this issue, given the types of results shown here and in light of the tax
benefits of home ownership is the following:

1) Buying and owning your home generally makes sense
2) Buying substantially more house than you need is, in general, less than ideal as an
investment—this is a consumption decision

3) Buying more house rather than fully taking advantage of tax-deferred retirement
accounts is likely to be an expensive choice in the long-term

4) It may make more sense to invest in REIT’s than to accelerate the pay-off on your
mortgage if you want to invest in real estate
11
5) Investing in real estate via REIT’s is likely to generate higher returns over the
long-haul than buying a more expensive home
6) Real estate is not a ‘special’ asset class—it abides by the long-term balance in risk
and return that capital markets provide
7) The historical rate of return on residential real estate is substantially less than has
been achieved by stocks over long historical periods
The link to the Fido paper is dead.

Another paper this one links to:

Homeownership and Investment in Real Estate Stocks
Executive Summary. One viewpoint is that because
homeowners already own real estate, they should diversify
their investment portfolios by not making additional
real estate investments. This paper provides an interpretation
of owner-occupied housing as an investment and
presents empirical results on the financial performances
of houses and financial assets, including REITs, as individual
investments and within a portfolio. The analysis
shows that portfolios with 10% to 20% allocations to
REITs historically have generally been able to achieve
higher average annual returns, with no increase in volatility,
compared to portfolios without REITs. This holds
not only for renters, but also for homeowners with onethird
or two-thirds of their wealth invested in their
house.
These findings are attributable to the low correlation
between changes in house prices and the returns
to real estate stocks, together with the historically competitive
returns on real estate stocks relative to other
financial assets.
You can tell this article is from 2003 with those asset allocation percentages in REITs!

Paul
...and then Buffy staked Edward. The end.

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Shaoya
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Post by Shaoya » Mon Aug 30, 2010 11:28 pm

Wow...I've learned quite a bit from this thread. Thanks - all of you - Shaoya

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Post by LH » Tue Aug 31, 2010 3:16 am

REITS are good for a portfolio. I would go into them. They are great diversifiers. fundamentally different from business stocks, from the income based on land rents, to the metrics used, example: FFO vs PE, to the different law needed to make it viable(REIT law), to the 90 percent payout by law....... on and on. Different correlation in the past from business stocks and bonds, because, well..... they are clearly are different. This will continue. There are too many things different in REITS, to start correlating well with business stocks and bonds for long periods of time. Just fundamentally different animals.

If you are going in when REITS are high, just do it and never undo it, seriously, just outlaw EVER changing the decision. If you think you cannot do that, then do not go into it, you are just chasing performance.

If you find yourself moving in and out of things in the past, then do NOT go into REITS. you will likely go back out when they drop. they are volatile. you will buy high, sell low.

One way to get around possible behavoiral bias, is to wait a year, then go into REITS.

I would just switch to REITS now, and stick with it forever.

LH

PS Owning ones home is NOT a REIT. Its really not an investment per se, it is land ownership, but its not an investment per se that one expects a RETRUN, it is a store of value. Its expected long term return is to track inflation more or less. When throwing in paying off mortgage, it does have return more akin to a bond return. It does have imputed rent and such after that.

REITS are good for a portfolio because
1)they return like stocks
2)the have low correlation
3)one can rebalance REITS with business stocks, bonds.
and kinda
4)they are a proxy for land ownership that generated income stream via rents, which basically ties into correlation benefit.

A home has none of that, except for 4 is a sense. A home is not a REIT. Its not covered under REIT law, its not measured by FFO, it does not have expected return like REITS, its correlation is largely irrelevant on a portfolio basis. You cannot rebalance a home. Your home does generate "imputed rents". Your home when paying off mortage, does basically generate bond like returns....

Its not completely cut and dry, or it would not be a oft repeated question. But REITS are land investment proxy, with multiple portfolio advantages equal to business stocks and bonds, whereas home ownership, simply does not have these advantages.

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Post by seugene » Sun Sep 05, 2010 12:15 am

Adrian Nenu wrote:REIT index potential risk of loss:

(1-SD)^3 = .595 x .595 x .595 = .2106 or 78.94% loss.
What does this number mean exactly? Is it how high the loss can be potentially? Over a calendar year or over a rolling year from top to bottom? With what probability? Does it account for valuations? The formula seems overly simplistic to me to really mean anything.

RE: adding REITs now... I am an asset class collector, and I love REITs, but of all my 14 asset classes, REITs have beaten the pants off of the other 13 year to date. They returned more than 21% v. less than 5% for the next best performing asset class. I would ask if you are absolutely sure you are not chasing performance, but I would not trust your answer, so why even bother asking? It is nothing personal, just that humans tend to be subconsciously affected by the past returns numbers even if rationally they understand that should not affect their decision. We also tend to be greedy, overestimate the importance of recent trends, to think they'll continue and even to view as trends something that is entirely random. It is so deep and so prevalent, that I would seriously advise against adding REITs now. Yes, this is market timing, but to increase the chances of it working for you and to remove emotions and the detrimental subconscious thinking, decide in advance how badly REITs need to be beaten in order to trigger adding them to your portfolio, like after a year of more than 7% loss, or a year of under-performing S&P 500 index or something similar, then STICK to that decision and get in lower rather than higher. If you'll be like "oh never mind" and you'll find a million reasons (all still looking very good and smart, just like adding REITs now appears) to NOT add them when that happens, then draw some good behavioral conclusions after that roller coaster of your attitude towards REITs and decide that you should NEVER hold them in addition to what TSM already has.

Again, this is nothing against you. We all need sometimes to protect us against ourselves.

And if you are itching to add something to your portfolio, add small value stocks (US or international) or International Real Estate (WPS) instead: all of these are more down compared to other asset classes over 1 and 3 years.

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