Thanks Kevin. I see it now.Kevin M wrote:I told you in my first post in your thread!tc101 wrote: What are the 3 sectors suggested by Bernstein?
Kevin
Why is REIT only sector fund recommended in slice & dice?
Re: Why is REIT only sector fund recommended in slice & dice
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Re: Why is REIT only sector fund recommended in slice & dice
That is just what I needed Kevin. It answers most of my questions. Thanks.Kevin M wrote:Yes. One is Portfolio Visualizer. It's what I used to provide the correlations and regression coefficients above.tc101 wrote:Isn't there something like a calculator somewhere on line that lets you test correlations of different indexes?
Kevin
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The most important thing you should know about me is that I am not an expert.
Re: Why is REIT only sector fund recommended in slice & dice
Since REITS are 90% pass-through, doesn't their expected return approximately equal their yield, currently < 3% ? If so, seems like a terrible risk/return proposition. VCIT-- interm-term corp BBB-- has the same yield.
Re: Why is REIT only sector fund recommended in slice & dice
REITS once may have semi-justified a separate allocation - they had 7% yields and low volatility. Today they're not practically different from any other sector.
I think people who spice up their portfolios with a small REIT allocation are just finding comfort in complexity - more funds equals more diversification, right?
I think people who spice up their portfolios with a small REIT allocation are just finding comfort in complexity - more funds equals more diversification, right?
Re: Why is REIT only sector fund recommended in slice & dice
Any thoughts on VNQI ANGUARD GLOBAL EX U S REAL ESTATE INDEX FD ETF ?
Does this have all the problems, and advantages that people have mentioned here for USA REITs?
Does this have all the problems, and advantages that people have mentioned here for USA REITs?
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The most important thing you should know about me is that I am not an expert.
Re: Why is REIT only sector fund recommended in slice & dice
Here are the correlations shown by PortfolioVisualizer for the four sector funds Vanguard offers, along with total stock (VTSMX) and small-cap value (VISVX) for the longest period available for all of them in PV:tc101 wrote: Do any of the other sectors like health, technology, consumer cyclicals and so on have a lower correlation to the total market than small cap value?
Observations:
Three of the four sector funds correspond to the sectors identified by Bernstein as candidates for separate portfolio holdings (REITS, precious metals and mining stocks, energy stocks). The exception is healthcare.
All of the sector funds had lower correlation to TSM than the SCV fund over this time period.
All sector funds and SCV had higher annualized returns than TSM over this period.
If fund popularity were based on returns over this period, Energy and Healthcare would be more popular than REITs.
Not shown here, but the R^2 values for regressions of the sector fund returns on the FF 3-factor model are pretty low (0.4-0.6) or very low (0.2 for Precious Metals and Mining), which I believe means that the model doesn't do a great job of explaining the returns. By comparison, R^2 for SCV (VISVX) is 0.93. Note though that periods covered for the regressions are different: starting 1984 for the non-REIT sector funds, 1996 for REIT, and 1998 for SCV.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: Why is REIT only sector fund recommended in slice & dice
Thanks for posting that. The lower correlation means that in a slice and dice portfolio the rebalancing bonus would be higher. So I wonder why this is not suggested more often?All of the sector funds had lower correlation to TSM than the SCV fund over this time period.
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The most important thing you should know about me is that I am not an expert.
- Clearly_Irrational
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Re: Why is REIT only sector fund recommended in slice & dice
Because it's uncompensated risk? In order for sector plays to make sense you have to throw out the whole theoretical underpinning that makes passive investing rational in the first place.tc101 wrote:So I wonder why this is not suggested more often?
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Re: Why is REIT only sector fund recommended in slice & dice
Beyond portfolio diversification, another reason for a separate, overweight allocation to REITs is increased inflation protection. Based on the studies I've seen, there's strong evidence that publicly-traded equity REITs (such as Vanguard's REIT Index) have historically provided effective inflation protection for U.S. investors. For example:
Inflation and Real Estate Investments, by Case & Wachter, 2011.
Inflation and Real Estate Investments, by Case & Wachter, 2011.
This may be part of Mr. Bernstein's overweighting of the real estate and energy sectors — the "deep risk" of inflation and all that. Personally, these two sectors have been overweighted in my portfolio design for years, for this reason.Case & Wachter wrote:The empirical evidence examined in this paper suggests that a variety of assets have inflation-protecting characteristics. Real estate, considered a strong inflation hedge on conceptual grounds, has in fact performed as well as, or better than, other inflation-sensitive assets in the historical sample considered, and has not exposed investors to significant directional inflation risk. Indeed, based on both empirical results and theoretical arguments, real estate, accessed through publicly traded equity REITs, provides attractive return characteristics and deserves consideration in diversified inflation-protected portfolios.
Re: Why is REIT only sector fund recommended in slice & dice
Indeed, REITs are not a good value today, as Dr. Bernstein has recently noted. Unfortunately a lot of folks seem attached to his 1999 views on them.countmein wrote:Since REITS are 90% pass-through, doesn't their expected return approximately equal their yield, currently < 3% ? If so, seems like a terrible risk/return proposition. VCIT-- interm-term corp BBB-- has the same yield.
Re: Why is REIT only sector fund recommended in slice & dice
Either you are buy and hold (and perhaps rebalance) or you are a market timer (or tactical asset allocator if you wish). I take the former approach. So I understand and accept that over the long haul all assets (even if one only holds TSM and TBM) will at times appear high priced/low return and at others will appear low priced/high return. I don't believe I can time market moves so while asset X Y or Z might appear to be a good value or a bad value today I don't market time based on such opinions.steve_14 wrote:Indeed, REITs are not a good value today, as Dr. Bernstein has recently noted. Unfortunately a lot of folks seem attached to his 1999 views on them.countmein wrote:Since REITS are 90% pass-through, doesn't their expected return approximately equal their yield, currently < 3% ? If so, seems like a terrible risk/return proposition. VCIT-- interm-term corp BBB-- has the same yield.
If you want to market time (or employ "tactical asset allocations") you of course should do so. I personally have never seen any evidence that one should expect to benefit from doing so (though it does "sound good on paper")
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Why is REIT only sector fund recommended in slice & dice
Yes, this is a great point. I would expect REITS would be the next best things after 1) Long term debt and 2) TIPS for inflation protection.Simplegift wrote:Beyond portfolio diversification, another reason for a separate, overweight allocation to REITs is increased inflation protection.
Re: Why is REIT only sector fund recommended in slice & dice
I'm confused. Is a 21% YTD return (11% return for the last 13 years) on a fund I've bought and held according to my long-term investment plan a good or a bad thing now?Indeed, REITs are not a good value today, as Dr. Bernstein has recently noted. Unfortunately a lot of folks seem attached to his 1999 views on them.
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Re: Why is REIT only sector fund recommended in slice & dice
Depends apparently on whether you think you can predict markets and make tactical moves or if you are a simple buy and hold a long term asset allocation sort of person. I don't jump in and out, personally.Index Fan wrote:I'm confused. Is a 21% YTD return (11% return for the last 13 years) on a fund I've bought and held according to my long-term investment plan a good or a bad thing now?Indeed, REITs are not a good value today, as Dr. Bernstein has recently noted. Unfortunately a lot of folks seem attached to his 1999 views on them.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Why is REIT only sector fund recommended in slice & dice
I am curious about your thoughts on the Vanguard international real estate fund and ETF.
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Re: Why is REIT only sector fund recommended in slice & dice
Has nothing to do with market timing or opinions. Either you consider expected returns or you don't. It's not an opinion that REITs have stock-like risk for bond-like expected returns, that's just the present reality.Rodc wrote: Either you are buy and hold (and perhaps rebalance) or you are a market timer (or tactical asset allocator if you wish). I take the former approach. So I understand and accept that over the long haul all assets (even if one only holds TSM and TBM) will at times appear high priced/low return and at others will appear low priced/high return. I don't believe I can time market moves so while asset X Y or Z might appear to be a good value or a bad value today I don't market time based on such opinions.
If you want to market time (or employ "tactical asset allocations") you of course should do so. I personally have never seen any evidence that one should expect to benefit from doing so (though it does "sound good on paper")
Re: Why is REIT only sector fund recommended in slice & dice
If the yield is X then your expected return is X. Past 13 years doesn't have much to do with it other than tell you how volatile it can be.Index Fan wrote:I'm confused. Is a 21% YTD return (11% return for the last 13 years) on a fund I've bought and held according to my long-term investment plan a good or a bad thing now?Indeed, REITs are not a good value today, as Dr. Bernstein has recently noted. Unfortunately a lot of folks seem attached to his 1999 views on them.
Re: Why is REIT only sector fund recommended in slice & dice
Deciding on what is "overrpriced NOW" and buying and selling (changing asset allocation) is market timing based on opinion.countmein wrote:Has nothing to do with market timing or opinions. Either you consider expected returns or you don't. It's not an opinion that REITs have stock-like risk for bond-like expected returns, that's just the present reality.Rodc wrote: Either you are buy and hold (and perhaps rebalance) or you are a market timer (or tactical asset allocator if you wish). I take the former approach. So I understand and accept that over the long haul all assets (even if one only holds TSM and TBM) will at times appear high priced/low return and at others will appear low priced/high return. I don't believe I can time market moves so while asset X Y or Z might appear to be a good value or a bad value today I don't market time based on such opinions.
If you want to market time (or employ "tactical asset allocations") you of course should do so. I personally have never seen any evidence that one should expect to benefit from doing so (though it does "sound good on paper")
Of course that is an opinion. Now it might be a somewhat informed opinion, not one plucked out of the air, but it is still an opinion. Benefiting from buying and selling on such an opinion has rarely worked out well. This is indeed how active funds work and we know how well.It's not an opinion that REITs have stock-like risk for bond-like expected returns, that's just the present reality
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Why is REIT only sector fund recommended in slice & dice
I'm just saying the yield is the expected return and the volatility is what it is. Stating expected return is not stating an opinion, just like it is not an opinion to state that the expected return on BND is approximately 2% nominal. Deciding that corp bond expected returns for stock-like volatility is not worth it is, I suppose, an opinion insofar as any allocation decision is based on "opinion" (assessment and choice). And so what? You're making a weird argument that one should refuse to look at the risk/return characteristics of the things they invest in. How did you decide to invest in stocks and bonds in the first place? Was that not "tactical"? Would you buy a rental property with a negative cap rate because your IPS says "own rental property"? Would you hold bonds with negative yields if CDs and savings accounts offered positive yields?Rodc wrote:
Of course that is an opinion. Now it might be a somewhat informed opinion, not one plucked out of the air, but it is still an opinion. Benefiting from buying and selling on such an opinion has rarely worked out well. This is indeed how active funds work and we know how well.
Re: Why is REIT only sector fund recommended in slice & dice
Why do you think the yield is expect return? That seems fundamentally wrong to me but I would love to know if I am missing something because ignoring growth (or lack of it) goes against everything I know about valuing companies.countmein wrote:
I'm just saying the yield is the expected return and the volatility is what it is.
Re: Why is REIT only sector fund recommended in slice & dice
REITs have to distribute all of their profits, so there really isn't any "growth".Why do you think the yield is expect return? That seems fundamentally wrong to me but I would love to know if I am missing something because ignoring growth (or lack of it) goes against everything I know about valuing companies.
Take a look at the VG Fund's returns since 1999: https://personal.vanguard.com/us/funds/ ... INT#tab=1a
Its capital return has been an impressive 142% over that time span. However, that is almost entirely explained by the drop in dividend yield from over 6% to under 3% (when the yield drops by half, the price doubles). Going forward, further yield declines are the only way that it can continue to outperform the yield. That certainly can happen, but I don't know that anyone would say that you should "expect" it to.
Re: Why is REIT only sector fund recommended in slice & dice
Tactical asset allocation is a pretty well defined term. It is generally meant to mean to shift allocations modestly based on shifting predictions of future expected returns. It is not meant to mean whole sale changes, changes based on simple chart reading, or a fixed allocation based on fixed long term expected returns. Based on that definition I would claim I did not set my allocation based on tactical considerations. I did set an allocation based on very rough historical expectations. I personally think that is the best one can do. Based on that I also believe that no one can set an optimal for them stock/bond split to closer than +/- 10% or perhaps even better than +/- 20%. There just isn't more accuracy to be had given the host of unknowns.countmein wrote:I'm just saying the yield is the expected return and the volatility is what it is. Stating expected return is not stating an opinion, just like it is not an opinion to state that the expected return on BND is approximately 2% nominal. Deciding that corp bond expected returns for stock-like volatility is not worth it is, I suppose, an opinion insofar as any allocation decision is based on "opinion" (assessment and choice). And so what? You're making a weird argument that one should refuse to look at the risk/return characteristics of the things they invest in. How did you decide to invest in stocks and bonds in the first place? Was that not "tactical"? Would you buy a rental property with a negative cap rate because your IPS says "own rental property"? Would you hold bonds with negative yields if CDs and savings accounts offered positive yields?Rodc wrote:
Of course that is an opinion. Now it might be a somewhat informed opinion, not one plucked out of the air, but it is still an opinion. Benefiting from buying and selling on such an opinion has rarely worked out well. This is indeed how active funds work and we know how well.
While shifting allocations based on reading stock valuations (Tobins' Q, P/E10), bond valuations (current yield), REIT valuations, sounds smart and reasonable on paper it has in practice been little better than the search for the fountain of youth. No one has ever found such a fountain and few have ever had much success in the real world with tactical asset allocation.
I also note that if one defines tactical asset allocation as shifting from a fixed allocation by 5%-10%, which is consistent with William Bernstein, Bogle and others, in practice this mean more or less you have a fixed allocation for 90%-95% of your funds and have a market timing fund with 5%-10% of your funds. So even if one believes in taking valuations into account, valuations due not play a driving role: 5% to 10% can only play a minor role in your overall success and entails shifts that are smaller than 10% to 20% level of accuracy in setting the base allocation in the first place.
So back to the beginning and my comment to Steve: if one believes that real estate is worth holding as part of either a buy/hold portfolio or even as part of a portfolio using tactical asset allocation as defined by Bernstein or Bogle, you don't hold it based on current opinions of valuations (though you might shade the allocation a little). If you want to make wholesale changes in asset allocation that is a different matter and good luck with that.
I would also note to you and Steve, that it is grave mistake to look at the valuations of one asset in total isolation. It would be one thing if real estate were high priced and stocks and bonds low priced. This is not the case today. Everything is priced for lower than average returns going forward, at least by the standards of P/E10 and current yield. So in my opinion suggesting one not hold real estate simply because the current yield is low is a double mistake.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Why is REIT only sector fund recommended in slice & dice
What about Vanguard Health Care fund as a recommended sector? It has returned approximately 17% since the 80's. Approximately 1/6 of The US economy (I think?) is healthcare related. People are still going to get sick, advancements are still being made in healthcare. Even with ACA being law, it has returned high percentages. In 2008 it didn't lose much more than an S&P 500 fund. Why not this fund in addition to other core holdings?
Re: Why is REIT only sector fund recommended in slice & dice
And why did the yield go down? Because people were willing to pay more for those shares because of their profit growth. As far as being a no growth business, look at a REIT like AVB. Net income went from 156 in 2009 to 353 last year. How much would you pay for a company that was doubling its profits every 5 years? If the revenue was flat (see the 90s), you would see yields back up around 8%+. REITs are businesses. Dividends are nice but they are they are only part of the equation. When you see a 10% yield on a stock there are always two possibilities. One it is a great value play. Two it is a value trap and that the dividend is expected to be cut.stlutz wrote:REITs have to distribute all of their profits, so there really isn't any "growth".Why do you think the yield is expect return? That seems fundamentally wrong to me but I would love to know if I am missing something because ignoring growth (or lack of it) goes against everything I know about valuing companies.
Take a look at the VG Fund's returns since 1999: https://personal.vanguard.com/us/funds/ ... INT#tab=1a
Its capital return has been an impressive 142% over that time span. However, that is almost entirely explained by the drop in dividend yield from over 6% to under 3% (when the yield drops by half, the price doubles). Going forward, further yield declines are the only way that it can continue to outperform the yield. That certainly can happen, but I don't know that anyone would say that you should "expect" it to.
Will these companies continue their growth path? I have no clue. I have the same chance of getting that right as I do of figuring out what apples share price will be in 10 years. The trend might continue that long or it might reverse.
Re: Why is REIT only sector fund recommended in slice & dice
Rodc
Looking at REIT expected returns in isolation is exactly the opposite of what I'm doing. I'm noting that the expected returns are similar to corporate bonds and well below stocks-- all for a volatility that's stock-like and drawdowns that are even worse. The "grave mistake" IMO is not demanding compensation for the risks you take.
Also it's misplaced to try to characterize this view as market timing. Market timing would mean I believe to forsee a drawdown event and wish to dodge it. Not so- I have no opinion on how the path to expected return will play out (and by how much it will miss the target).
As for the word "tactical"- who cares?
Still wondering your answers to these questions-
Would you own REITs if yields were zero (assuming positive yields in bank accounts)?
Would you hold bonds if yields were zero?
If yes to either, why do you not demand compensation for risk taking? If no, is that "tactical" / a "grave mistake" / a "double mistake" ?
Looking at REIT expected returns in isolation is exactly the opposite of what I'm doing. I'm noting that the expected returns are similar to corporate bonds and well below stocks-- all for a volatility that's stock-like and drawdowns that are even worse. The "grave mistake" IMO is not demanding compensation for the risks you take.
Also it's misplaced to try to characterize this view as market timing. Market timing would mean I believe to forsee a drawdown event and wish to dodge it. Not so- I have no opinion on how the path to expected return will play out (and by how much it will miss the target).
As for the word "tactical"- who cares?
Still wondering your answers to these questions-
Would you own REITs if yields were zero (assuming positive yields in bank accounts)?
Would you hold bonds if yields were zero?
If yes to either, why do you not demand compensation for risk taking? If no, is that "tactical" / a "grave mistake" / a "double mistake" ?
Re: Why is REIT only sector fund recommended in slice & dice
I was looking at REITs in aggregate. I agree that if you can select the best REITs ahead of time you'll do better, as some REITs will grow and others will shrink.As far as being a no growth business, look at a REIT like AVB...
Again, REITs have to distribute their income to shareholders. As such, "growth" (in aggregate) is a function of inflation. If rents on average go up, so will the income of REITs. And, if property values increase on average, then the book value of the REIT will as well.
They are different from, say, Apple. Apple can create EPS growth by buying back stock or they can grow the company by reinvesting income in the business.
Yields on REITs aren't that exciting right now. Then again, with stock market valuations not being cheap and with interest rates being low, one should have muted from most standard investments. I certainly don't see anything that says to me that REITs will offer turbocharged returns for the next 10 years. If yields dropped by half again, it could happen. Don't know that I would place a big bet on it, though.
Re: Why is REIT only sector fund recommended in slice & dice
I had not thought about this at all until this thread, but I am persuaded by countmein's arguments about the low return of REITs.Looking at REIT expected returns in isolation is exactly the opposite of what I'm doing. I'm noting that the expected returns are similar to corporate bonds and well below stocks-- all for a volatility that's stock-like and drawdowns that are even worse. The "grave mistake" IMO is not demanding compensation for the risks you take.
I am interested in the the Vanguard Global ex-U.S. Real Estate ETF. I can not find it's yield, but it has a PE of 12.5x, while the REIT index has a PE of 60.5x. So the international real estate fund seems to be a much better deal.
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Re: Why is REIT only sector fund recommended in slice & dice
They are currently zero real and maybe less, so the answer is yes. I note I also hold some cash for which nominal is not far from zero.Would you hold bonds if yields were zero?
I hold a fixed asset allocation, so in general when the price run up happens that leads to very low expected returns in REITS or Stocks, I have been selling to rebalance not buying so I am taking profit. Unfortunately over the last few year when this was taking place I was buying bonds with real returns that were below zero.
Returns have been extremely strong for stocks and Reits over the last few years. Going forward for a while all assets are likely to provide poor returns. The average then will likely be about average. This is the nature of how index investing with a fixed asset allocation works.
If one tries to time things they might do better than average or they may not. The class of active investors of course will be average minus costs. I am happy to be average with low costs. I really do not lose sleep over the poor landscape that currently exists across all assets. There is nothing special about REITS in regards to poor prospects over the immediate future.
I note that if I were to sell all my REITS there are no assets that look all that great into which to put the proceeds.
Last edited by Rodc on Sat Sep 06, 2014 7:15 pm, edited 1 time in total.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Why is REIT only sector fund recommended in slice & dice
That is the best counter argument I have seen. I think maybe international real estate might be a better asset.I note that if I were to sell all my REITS there are no assets that look all that great into which to put the proceeds
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The most important thing you should know about me is that I am not an expert.
Re: Why is REIT only sector fund recommended in slice & dice
Perhaps. I'm not entirely convince that US REITS long term are all that worthwhile. I have some but I am also not convinced they are a particular mistake either, so in the interest of not blowing here and there in the winds of opinion of their worth I am just sticking to my plan. The issue I have with international REITS is I have less understanding of them and the funds I have available don't have a track record.tc101 wrote:That is the best counter argument I have seen. I think maybe international real estate might be a better asset.I note that if I were to sell all my REITS there are no assets that look all that great into which to put the proceeds
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Why is REIT only sector fund recommended in slice & dice
FWIW, I agree with most of what Rodc says (here and elsewhere BTW), but this thread has drifted from the original topic into just another thread on whether or not one should include REITs in one's portfolio.
Since the thread has drifted to the more generic topic, I'll just mention that one change I've made with respect to my REIT allocation, based on possibly somewhat high valuation, is to shift my rebalancing band from -10%/+25% to -20%/+15% of its absolute $ target value. I recently hit the revised upper band limit (when VNQ hit about $77/share), and sold back to target. So I'm not as pure as Rodc here, and am engaging in what I consider to be modest tactical asset allocation.
Kevin
Since the thread has drifted to the more generic topic, I'll just mention that one change I've made with respect to my REIT allocation, based on possibly somewhat high valuation, is to shift my rebalancing band from -10%/+25% to -20%/+15% of its absolute $ target value. I recently hit the revised upper band limit (when VNQ hit about $77/share), and sold back to target. So I'm not as pure as Rodc here, and am engaging in what I consider to be modest tactical asset allocation.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: Why is REIT only sector fund recommended in slice & dice
Hi Kevin,Kevin M wrote:FWIW, I agree with most of what Rodc says (here and elsewhere BTW), but this thread has drifted from the original topic into just another thread on whether or not one should include REITs in one's portfolio.
Since the thread has drifted to the more generic topic, I'll just mention that one change I've made with respect to my REIT allocation, based on possibly somewhat high valuation, is to shift my rebalancing band from -10%/+25% to -20%/+15% of its absolute $ target value. I recently hit the revised upper band limit (when VNQ hit about $77/share), and sold back to target. So I'm not as pure as Rodc here, and am engaging in what I consider to be modest tactical asset allocation.
Kevin
Yes, I got pulled off the main thread as I often do. I think the original question was best answered by simply noting that real honest to goodness real estate is considered an asset class different from stocks, and REITS are a proxy (one has to decide if it is a good enough proxy or not) for honest to goodness real estate. The other contenders in the OP simply are not separate assets in the same way that real estate is a separate asset. Once that was said it was time to get on to other aspects.
As to purity, I'm actually not dogmatic about tactical asset allocation, I am just skeptical that it can routinely be employed to much benefit and that even when done well that it makes much difference (too little money is in play), and as such I feel compelled to complain when folks, including well known authors who I feel should know better, make grand claims for its importance and the importance of the required forecasting.
Moreover, I really got off on the tangent not over modest tactical asset allocation changes but a rather bold assertion without back up of thoughtful argument or data that holding of any REITS at all (as opposed to modest shifting of allocation) is a matter of ignorance and current valuations (ignoring long term considerations). Being agnostic as to the value of a long term strategy of holding REITS I am certainly open to thoughtful arguments on either side (and hopefully open to thoughtful arguments even where I have stronger opinions). We all have our human failings. Every once in a while I get irked by mindless dogma, which is one of my failings; perhaps it would have been better to just let it pass.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Why is REIT only sector fund recommended in slice & dice
Some people hold REITs and stay the course.
Some people don't hold REITs and stay the course.
Both are reasonable.
The difficulty is when you are considering changing your asset allocation, perhaps based on reading what others say your portfolio should include. That's when valuations could matter. The question then is not how much REITs one should hold over the long term, but rather it's should one move a chunk of their portfolio into REITs now.
It is reasonable to sometimes change your asset allocation based on new information/circmustances. But if you do it too often it can drag on your portfolio.
Some people don't hold REITs and stay the course.
Both are reasonable.
The difficulty is when you are considering changing your asset allocation, perhaps based on reading what others say your portfolio should include. That's when valuations could matter. The question then is not how much REITs one should hold over the long term, but rather it's should one move a chunk of their portfolio into REITs now.
It is reasonable to sometimes change your asset allocation based on new information/circmustances. But if you do it too often it can drag on your portfolio.
Re: Why is REIT only sector fund recommended in slice & dice
.....
Last edited by countmein on Mon Sep 08, 2014 2:15 pm, edited 1 time in total.
Re: Why is REIT only sector fund recommended in slice & dice
Feel free to pick another example. But lets look at VNQ's distribution growthstlutz wrote:REITs have to distribute all of their profits, so there really isn't any "growth".Why do you think the yield is expect return? That seems fundamentally wrong to me but I would love to know if I am missing something because ignoring growth (or lack of it) goes against everything I know about valuing companies.
Take a look at the VG Fund's returns since 1999: https://personal.vanguard.com/us/funds/ ... INT#tab=1a
Its capital return has been an impressive 142% over that time span. However, that is almost entirely explained by the drop in dividend yield from over 6% to under 3% (when the yield drops by half, the price doubles). Going forward, further yield declines are the only way that it can continue to outperform the yield. That certainly can happen, but I don't know that anyone would say that you should "expect" it to.
2010 - 1.89
2013 - 2.79
Sure looks like growth to me:) Seriously REITs are just like any other stock. When there is a lot of growth, you pay a higher PE. No growth leads to lower PE. There are potential headwinds to REIT performance going forward (i.e. higher cost of capital if interest rates rise, sluggish economy and slack market(for office space) might limit ability to raise prices) but yield isn't one of them. If it was all about picking out the highest yielding reit to get good returns, there are a bunch of 6%+ ones out there. There is a reason though why their yield is higher than index.
Re: Why is REIT only sector fund recommended in slice & dice
countmein,
My comments were really not directed at you. I had someone else in mind.
Rant: speak or shout at length in a wild, impassioned way
I don't think you will find anything like a rant in my posts, though sometimes I do get a little wordy. I have been rational, calm, and dispassionate. The opposite of a rant in fact. I am guilty of going off on a tangent, but that is an entirely different matter.
Indeed when you challenged me with some questions I did my best to provide honest, open, and polite answers.
Perhaps you will provide me with the same courtesy.
Suppose one has a basic policy in normal times of holding 30% TSM, 20% ITSM, 40% TBM and 10% US REITS.
Given current valuations what is your advice? You may have provided it and I missed it. Valuations matter to you. Apparently they matter quite a lot. (They matter to me as well as I expect and plan for low returns going forward).
Would you advise someone to dump all their REITS? If so what would you have them buy and why? And how big an effect would this have if say it took 5 years for valuations to normalize vs doing nothing?
Would you advise them to adjust a bit, say move to 7% or 5%, and if so what would you have them buy and how big an effect would this have if say it took 5 years for valuations to normalize vs doing nothing?
Thanks.
My comments were really not directed at you. I had someone else in mind.
Rant: speak or shout at length in a wild, impassioned way
I don't think you will find anything like a rant in my posts, though sometimes I do get a little wordy. I have been rational, calm, and dispassionate. The opposite of a rant in fact. I am guilty of going off on a tangent, but that is an entirely different matter.
Indeed when you challenged me with some questions I did my best to provide honest, open, and polite answers.
Perhaps you will provide me with the same courtesy.
Suppose one has a basic policy in normal times of holding 30% TSM, 20% ITSM, 40% TBM and 10% US REITS.
Given current valuations what is your advice? You may have provided it and I missed it. Valuations matter to you. Apparently they matter quite a lot. (They matter to me as well as I expect and plan for low returns going forward).
Would you advise someone to dump all their REITS? If so what would you have them buy and why? And how big an effect would this have if say it took 5 years for valuations to normalize vs doing nothing?
Would you advise them to adjust a bit, say move to 7% or 5%, and if so what would you have them buy and how big an effect would this have if say it took 5 years for valuations to normalize vs doing nothing?
Thanks.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Why is REIT only sector fund recommended in slice & dice
Rodc
Ok, my bad. My apologies for assuming.
To answer your question- Assuming no frictions, I would be inclined to swap out the reit allocation for something that offered better expected Sharpe. TSM would work. Might also reap the bonus of reclaiming tax-advantaged space. I think the loss of diversification benefit would be minimal enough to justify it (correlations are pretty high).
You may consider that kind of move market timing and I get it, but don't agree. One, it's agnostic on the details (ups and downs) of the future time series. Two, we are forced to make "active" decisions when allocating our resources, there is no getting around it. If that's the case then I don't know why we shouldn't endure more than one iteration of the exercise in order to maintain risk/return targets-- similar to rebalancing, but on the basis of expected return as opposed to asset class. I don't think buy and hold means that you have to hold a risky asset if it ceases to compensate.
Ok, my bad. My apologies for assuming.
To answer your question- Assuming no frictions, I would be inclined to swap out the reit allocation for something that offered better expected Sharpe. TSM would work. Might also reap the bonus of reclaiming tax-advantaged space. I think the loss of diversification benefit would be minimal enough to justify it (correlations are pretty high).
You may consider that kind of move market timing and I get it, but don't agree. One, it's agnostic on the details (ups and downs) of the future time series. Two, we are forced to make "active" decisions when allocating our resources, there is no getting around it. If that's the case then I don't know why we shouldn't endure more than one iteration of the exercise in order to maintain risk/return targets-- similar to rebalancing, but on the basis of expected return as opposed to asset class. I don't think buy and hold means that you have to hold a risky asset if it ceases to compensate.
Re: Why is REIT only sector fund recommended in slice & dice
So your selling one overvalued asset and buying another?:) I don't place a ton of faith in forecasts but pretty much all of them have the same expected returns for US stocks and REITs for the next 10-30 years. I don't get super excited about the idea of 7% returns from REITs but switching to TSM also making 7% isn't a win and switching to TBM making 4% is also not a win. It would be one thing if REITs had low projected returns and other classes had above average expected returns. Now if your personal model suggest a big TSM outperformance, go for it.countmein wrote:Rodc
Ok, my bad. My apologies for assuming.
To answer your question- Assuming no frictions, I would be inclined to swap out the reit allocation for something that offered better expected Sharpe. TSM would work. Might also reap the bonus of reclaiming tax-advantaged space. I think the loss of diversification benefit would be minimal enough to justify it (correlations are pretty high).
Re: Why is REIT only sector fund recommended in slice & dice
overvalued is your word not mine. Yes clearly if one were calculating expected returns such that TSM and REIT were equal, then not much point in swapping, hard to disagree with that.
Re: Why is REIT only sector fund recommended in slice & dice
Thank you for the answer.countmein wrote:overvalued is your word not mine. Yes clearly if one were calculating expected returns such that TSM and REIT were equal, then not much point in swapping, hard to disagree with that.
If I go back to my example,
If one were to completely drop REITS they could consider that 10% as part of their risky assets and buy TSM. I'm not entirely sure what the yield was a year ago, but I think it was high enough we could have had this conversation a year ago. And a year ago P/E10 was lower (not sure how much as Shiller's site seems to be down right at the moment). In this case as it turns out a change a year ago would have swapped an asset that returned 24% for an asset that returned 24%. No harm, no foul.
One might have said well if I am going to get ~2% expected return I might as well just buy TBM, in which case the switch was from an asset that happened to return 24% for one that returned 5% for a loss of 1% for the total portfolio. Not great, but you still have 99% of what you would have had and while not great that is not life alteringly bad either.
One might have said, well international stocks look somewhat better than US stocks, and since this process is valuation driven I'll swap out for ITSM. This is a switch from 24% to 18% or a net loss of 6% over a 10% allocation or 0.6%.
Now for sure the last year could have been dramatically different. But going forward if we use current valuations REITS are expected to return about 2.4% and stocks are expected to return about 3.8% based on E10/P a common estimate. A difference of 1.4% and an allocation of 10% is an expected benefit of 0.14% (+/- a ton as we see from last year's returns). Note I would take a free guaranteed 0.14% say from a reduction in ER, but this very far from guaranteed.
What about reducing risk?
To reduce risk in any significant way you would have to in this example sell REITS to buy TBM. This is easiest to examine if we assume stocks/reits are uncorrelated with bonds, which is a pretty good approximation, and assume stocks and reits are 100% correlated which is not such a great approximation, but is overly optimistic (this means the baseline case gets no benefit from REITS and stocks being less than 100% correlated).
If we also assume stocks have a standard deviation of 20% (annual) and bonds have a standard deviation of 5%, the baseline case has a standard deviation of just a tiny shade above 14% and swapping out the REITS for bonds reduces it to a bit above 12%. So you reduce the expected volatility by just a hair less than 2%. Honestly, I'm not sure most people would care about or even be able to notice that within the general ups and downs. 20% might be a little high. If you use 15% the reduction is only 1.4%.
And this completely ignore the current situation where one might rationally conclude that bonds are more risky now than in more normal times.
So, in short, while I agree this starts out as a sounds good on paper sort of thing, when I look at the potential benefits and harms from a 10% allocation I just don't see any particular value in jumping in and out. A tactical swing would of course provide proportionately less expected benefit.
And then perhaps the very biggest challenge we all face is "Do no harm", that is avoid behavioral mistakes. These sorts of mistakes are harder to estimate, but all the research says these are really where most people fall down. And the biggest is repeatedly making changes to buy high and sell low. Now of course the intent of valuations driven decisions is the opposite. I personally don't think it always works out that way in practice, and just for myself personally, I'd like to avoid the situation altogether. I think this is really the return vs risk situation that matters. Personally, as the arithmetic above shows the expected benefits to returns and risk are so small it just does not seem opening the door to unexpected behavioral mistakes. Just a caution, all the best to anyone who wants to try to squeak out the modest win that valuation driven asset allocation might provide if one does it well.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Why is REIT only sector fund recommended in slice & dice
This has been an excellent thread. We added International REITs to our US REIT index fund for additional diversification.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Why is REIT only sector fund recommended in slice & dice
I don't suppose you have like 40 years of international REIT index data laying around?:) I go back and forth on if they add diversity or concentrated risk. Most global real estate funds have a huge asia bias and have a good chunk of developed Europe in i country.abuss368 wrote:This has been an excellent thread. We added International REITs to our US REIT index fund for additional diversification.
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Re: Why is REIT only sector fund recommended in slice & dice
Hi Freddie,freddie wrote:I don't suppose you have like 40 years of international REIT index data laying around?:) I go back and forth on if they add diversity or concentrated risk. Most global real estate funds have a huge asia bias and have a good chunk of developed Europe in i country.abuss368 wrote:This has been an excellent thread. We added International REITs to our US REIT index fund for additional diversification.
I wish I did and perhaps someone else can add some additional analysis. The US REIT fund is approximately 135 companies and the International REIT fund is approximately 550 companies so together there are almost 700 companies. That is a lot more diversification. Yes, there is a weight to Asia, China, and Europe. It appears that on days our Total International increases or decreases, the International REIT is providing additional diversification.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Why is REIT only sector fund recommended in slice & dice
Some of the Couch Potato slice and dice portfolios also include the Energy sector.
http://assetbuilder.com/couch_potato/co ... o_cookbook
http://assetbuilder.com/couch_potato/co ... o_cookbook
Best Wishes, SpringMan
Re: Why is REIT only sector fund recommended in slice & dice
More stocks doesn't necessary give more returns or less correlation. In theory I am not too opposed to putting ~60% of my money into 4 countries (Japan, China, UK and Australia) but I would like to see some evidence that either the return is as good as US REITs or that they have some what different correlations. Unfortunately I have only seen data back to about 2000 and over that (admittedly short )period it looks like international returns a couple points less AND the correlation with US reits is pretty high. But that is an also a very abnormal period (bubble and crash) which I would hesitate to draw any conclusions from. My general conclusion a year ago was that if I bumped my REITs to 15-20%(from 10) I would add in but splitting my REITs 50/50 wasn't worth it. YMMV.abuss368 wrote:Hi Freddie,freddie wrote:I don't suppose you have like 40 years of international REIT index data laying around?:) I go back and forth on if they add diversity or concentrated risk. Most global real estate funds have a huge asia bias and have a good chunk of developed Europe in i country.abuss368 wrote:This has been an excellent thread. We added International REITs to our US REIT index fund for additional diversification.
I wish I did and perhaps someone else can add some additional analysis. The US REIT fund is approximately 135 companies and the International REIT fund is approximately 550 companies so together there are almost 700 companies. That is a lot more diversification. Yes, there is a weight to Asia, China, and Europe. It appears that on days our Total International increases or decreases, the International REIT is providing additional diversification.
Best.
Re: Why is REIT only sector fund recommended in slice & dice
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Last edited by jh on Wed Aug 21, 2019 2:01 pm, edited 1 time in total.
Retired in 2022 at the age of 46. Living off of dividends.
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Re: Why is REIT only sector fund recommended in slice & dice
Hi jh,jh wrote:I guess I am wacky but I invest in REITs because I want to own commercial real estate, not because of slice and dice.
I have been a renter so far and REITs are my only exposure to the real estate market.
This is our strategy too - to own commercial real estate and not slice and dice.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why is REIT only sector fund recommended in slice & dice
The International REIT fund has been established with Vanguard for approximately 4 years. I would be interested in knowing if more Bogleheads have started to invest in this asset class since inception.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Why is REIT only sector fund recommended in slice & dice
I've been in the fund since it started, moving half my REITs from the US to the international fund. (I also hold half my non-REIT stock in international.)abuss368 wrote:The International REIT fund has been established with Vanguard for approximately 4 years. I would be interested in knowing if more Bogleheads have started to invest in this asset class since inception.
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Re: Why is REIT only sector fund recommended in slice & dice
Same here.abuss368 wrote:Hi jh,jh wrote:I guess I am wacky but I invest in REITs because I want to own commercial real estate, not because of slice and dice.
I have been a renter so far and REITs are my only exposure to the real estate market.
This is our strategy too - to own commercial real estate and not slice and dice.
Best.