It's a good day to be heavy in REITs

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It's a good day to be heavy in REITs

Post by InvestorNewb »

Inspired by similar posts about it being a good day to be heavy in stocks/bonds, I thought I would create one for REITs given the growth today.

Currently up 1.60%. Good thing I have about 17% of my portfolio in REITs.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: It's a good day to be heavy in REITs

Post by livesoft »

REITs are more volatile than many other asset classes, so while 1.6% is appreciated, I'd consider a good day to be up 3% or more. 4% and 5% in a day is not unheard of. And the same for the downside.
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Re: It's a good day to be heavy in REITs

Post by nisiprius »

Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."

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Re: It's a good day to be heavy in REITs

Post by White Coat Investor »

I distinctly remember about a dozen days in late 2008 where REITs went up or down by 5-10% in a single day.
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Re: It's a good day to be heavy in REITs

Post by Tom_T »

This has been a good year for REITs so far. Last year, they got trounced by Total Stock Market (33% to 2%). Next year, who knows...

Besides, if you're not selling today, then the price doesn't mean anything.
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Re: It's a good day to be heavy in REITs

Post by Levett »

17%, eh?

REITS, like trees, don't grow to the sky.

Good luck.

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Re: It's a good day to be heavy in REITs

Post by InvestorNewb »

nisiprius wrote:Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."
Vanguard sees REITs as not being any riskier than the Total Stock Market or the S&P 500. Both carry a risk rating of 4.
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Re: It's a good day to be heavy in REITs

Post by Imbros »

InvestorNewb wrote:
nisiprius wrote:Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."
Vanguard sees REITs as not being any riskier than the Total Stock Market or the S&P 500. Both carry a risk rating of 4.
Well, I am relatively new to investing, but even I know that sector specific funds are always riskier than the funds that cover the whole stock market. It doesn't matter how Vanguard likes to rank them. :?
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Re: It's a good day to be heavy in REITs

Post by Beliavsky »

InvestorNewb wrote:
nisiprius wrote:Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."
Vanguard sees REITs as not being any riskier than the Total Stock Market or the S&P 500. Both carry a risk rating of 4.
According to Morningstar, the 10-year annualized volatilities through 2014-09-30 of VNQ and SPY have been 25.5% and 14.7%, so REITs have been much more volatile.
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Re: It's a good day to be heavy in REITs

Post by LBMM »

nisiprius wrote:Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."

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Re: It's a good day to be heavy in REITs

Post by John3754 »

InvestorNewb wrote:
nisiprius wrote:Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."
Vanguard sees REITs as not being any riskier than the Total Stock Market or the S&P 500. Both carry a risk rating of 4.
The REIT index contains a 138 securities all concentrated in a single highly volatile market sector, while the total market index contains 3742 securities across all market sectors. Do you honestly believe that those two funds carry the same amount of risk?
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Re: It's a good day to be heavy in REITs

Post by Beliavsky »

Imbros wrote:Well, I am relatively new to investing, but even I know that sector specific funds are always riskier than the funds that cover the whole stock market.
This is usually but not always the case. XLP, the Consumer Staples ETF, has been less volatile than SPY, an S&P 500 ETF, over the last 15 years according to Morningstar, 11.99% vs. 15.34%.
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Re: It's a good day to be heavy in REITs

Post by hoops777 »

It is a good day until it is a bad day :(
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Re: It's a good day to be heavy in REITs

Post by countmein »

from portfoliovisualizer -

VNQ max drawdown = 68%
VTSAX max drawdown = 51%
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Re: It's a good day to be heavy in REITs

Post by InvestorNewb »

John3754 wrote:The REIT index contains a 138 securities all concentrated in a single highly volatile market sector, while the total market index contains 3742 securities across all market sectors. Do you honestly believe that those two funds carry the same amount of risk?
I was just referencing Vanguard. Why do they keep the risk rating for REITs at 4 then? Why don't they upgrade it to 5 like international?

International contains 5,667 across all market sectors. It has a risk rating of 5.
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Re: It's a good day to be heavy in REITs

Post by Call_Me_Op »

InvestorNewb wrote:
John3754 wrote:The REIT index contains a 138 securities all concentrated in a single highly volatile market sector, while the total market index contains 3742 securities across all market sectors. Do you honestly believe that those two funds carry the same amount of risk?
I was just referencing Vanguard. Why do they keep the risk rating for REITs at 4 then? Why don't they upgrade it to 5 like international?

International contains 5,667 across all market sectors. It has a risk rating of 5.
I hope you don't base your investing decisions on Vanguard's riskometers.
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Re: It's a good day to be heavy in REITs

Post by Tom_T »

It's nice to boil down risk into a simple scale of 1-5, but that is oversimplification for the masses. A '4', according to Vanguard, means "moderate to aggressive funds." Isn't that a pretty broad category?

Anything above that encompasses the riskiest funds they can imagine. An international fund and a commodities fund would both get a '5'. Are they equally risky?
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Re: It's a good day to be heavy in REITs

Post by randomguy »

InvestorNewb wrote:
John3754 wrote:The REIT index contains a 138 securities all concentrated in a single highly volatile market sector, while the total market index contains 3742 securities across all market sectors. Do you honestly believe that those two funds carry the same amount of risk?
I was just referencing Vanguard. Why do they keep the risk rating for REITs at 4 then? Why don't they upgrade it to 5 like international?

International contains 5,667 across all market sectors. It has a risk rating of 5.
Since 1972
TSM STD:18.27%
REITS STD: 18.20%

Maybe TSM should get the 5?:) That being said 2007-2008 REIT collapse was epic. Maybe not quite as epic as the crash of 1929-32 but it is as close as I want to see.
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Re: It's a good day to be heavy in REITs

Post by nisiprius »

InvestorNewb wrote:
nisiprius wrote:Good grief. Have your fun, InvestorNewb but please reassure me that you are perfectly aware of 2008-2009. Losing half your money in the stock market is tough, but losing 2/3 of it in Vanguard REIT Index Fund is tougher. By all means invest in REITs if it makes sense to you, and I'm glad it's been a good day, but don't lose sight of the fact that you are being rewarded for taking risk. And sometimes you are punished for taking risk. That's what makes it "risk."
Vanguard sees REITs as not being any riskier than the Total Stock Market or the S&P 500. Both carry a risk rating of 4.
That's an interesting and valid observation, since I tend to regard Vanguard's risk indicators as sensible. In this case, though, in my arrogant opinion I'd say Vanguard is wrong, shame on Vanguard.

Look at the charts and decide for yourself what you think about the risk of Vanguard REIT Index Fund.

Vanguard REIT index dropped quite a bit farther than Vanguard Small Cap Value Index, Vanguard Total International Index, which it pegs at 5.

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Re: It's a good day to be heavy in REITs

Post by mptfan »

randomguy wrote: Since 1972
TSM STD:18.27%
REITS STD: 18.20%

Maybe TSM should get the 5?:) That being said 2007-2008 REIT collapse was epic. Maybe not quite as epic as the crash of 1929-32 but it is as close as I want to see.
Your standard deviation numbers since 1972 are very similar to the standard deviation numbers from my personal spreadsheet from 1985-2013 (the last 30 years):

TSM 17.63%
REITS 17.74%
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Re: It's a good day to be heavy in REITs

Post by abyan »

For those of you who hiold REITs, knowing in advance that they can be quite volatile, do you ever rebalance when they rise or drop 10% in a day, or only if overall their allocation crosses a rebalancing band? I'd imagine part of the problem is that if you hold an index fund, you don't really know what sale price you're going to end up with. But I can imagine it must be awfully tempting to rebalance when they fluctuate like that.
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Re: It's a good day to be heavy in REITs

Post by ray.james »

Nisi,
I think using Reit's data only from 2008/2009 could skew the outcome and magnify reits being more risky. Since the crisis itself is based on sub prime lending. That said they are riskier than total stock.

I am surprised international are rated as risk 5 and not 4. I thought it was emerging markets inclusiveness as cause, but even European fund/developed markets is rated 5.
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Re: It's a good day to be heavy in REITs

Post by tetractys »

Yes REITs are king this year, sort of like micro-caps were last year. A good illustration of the benefits of diversification, I think. -- Tet
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Re: It's a good day to be heavy in REITs

Post by Kevin M »

InvestorNewb wrote:Inspired by similar posts about it being a good day to be heavy in stocks/bonds, I thought I would create one for REITs given the growth today.

Currently up 1.60%. Good thing I have about 17% of my portfolio in REITs.
My new standard reply to posts like this is to show an overview of today's change as well as change relative to 52 week highs and lows:

Image

(I guess there's a glitch in the GoogleFinance function or source from which it pulls data that's causing the 0 value for the 52-week low for VO, but I don't own any mid-cap funds, so don't really care).

I took a quick glance earlier today, saw mostly mild blue for the day, and then went back to posting about bonds and bond funds. Since the stock market overall has been going down lately, I'd have to see deep red for the day to catch my attention (i.e., should I check for hitting lower limit of any rebalancing bands; I'm paying most attention to Europe and International small). This goes for REITs as well, since I recently hit my upper limit and rebalanced out, as mentioned in something I posted about my REIT policy in another thread a day or two ago:
Kevin M wrote: Again, due to my desire to tinker and try to get a little rebalancing bonus, I manage my REIT holding differently. I have a set dollar target for it, and asymmetrical rebalancing bands. For the last few years I was using a -10/+25 band, which worked out quite well as REITs were very volatile at times, but generally moved higher. Due to all the negative press for REITs lately, including a well-reasoned post here by BH author William Bernstein, I shifted my rebalancing band to -20/+15. I hit the upper limit when VNQ hit about $77/share (August I guess), and of course REITs are lower now (about 5% off the high of about $78 for VNQ, but obviously would have to drop a lot more before triggering a rebalancing buy).
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Re: It's a good day to be heavy in REITs

Post by Kevin M »

abyan wrote:For those of you who hiold REITs, knowing in advance that they can be quite volatile, do you ever rebalance when they rise or drop 10% in a day, or only if overall their allocation crosses a rebalancing band?
I use a rebalancing band, but I recall one day a few years ago when a 10% down day caused the fund price to pass through the lower limit of the band, and triggered a buy. That was very cool.

One interesting thing is that it had been less than two months since hitting the upper limit had triggered a sale (volatility!), so due to Vanguard's frequent trading policy, I couldn't buy REIT fund shares in the same account. Fortunately I have another IRA account with Vanguard that had cash and bonds in it, so bought the fund there instead.

Another interesting thing is that the next day the fund went up about 10% (once again, volatile!), so I really only had that one day to rebalance into it.
abyan wrote:I'd imagine part of the problem is that if you hold an index fund, you don't really know what sale price you're going to end up with.
That's exactly why I use ETFs in my spreadsheet, but you also could do it with any tool that monitors daily ETF prices. Since Vanguard has an ETF share class for REITs and most other index funds, you can get a pretty good idea of the closing price on volatile days. It's not perfect, since ETF market price can deviate from NAV, and of course the price could move a lot between whenever you enter your mutual fund buy order and close of market, depending on when you place your order.

Of course you also could do it by just using the ETF with limit orders. But I'd regret having a limit order executed to buy at a 5% drop if there were a 10% drop in one day. But then you don't have to use limit orders; you could just buy the ETF when you checked the market and saw it down 10%. But of course then it might go down another 5%. Or by the time you check it might have recovered 5%.
But I can imagine it must be awfully tempting to rebalance when they fluctuate like that.
Yep, and we have one prominent poster in particular who likes to buy on Really Bad Days, but I'm happier when a RBD follows a longer really bad period (like week or month or quarter or year), since it feels good to buy on a RBD (once you condition yourself this way), but I prefer to stick to my rebalancing bands--at least roughly. So ideally I'm looking for deep red in both the %<Hi52 column and the ChangePct (daily) column.

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Re: It's a good day to be heavy in REITs

Post by BahamaMan »

InvestorNewb wrote:Inspired by similar posts about it being a good day to be heavy in stocks/bonds, I thought I would create one for REITs given the growth today.

Currently up 1.60%. Good thing I have about 17% of my portfolio in REITs.
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Re: It's a good day to be heavy in REITs

Post by 209south »

I'm with InvestorNewb! I have 10% of my portfolio in REITs, mostly in Vanguard and half domestic, half international. I view real estate as a differentiated asset class which is under-represented in the equity markets...at 10% I am likely underweight real estate in total, but comfortable with that allocation, particularly in light of substantial personal real estate exposure. I rebalance when the asset class is more than 10% away from target...i.e. if I get below 4.5% or above 5.5% VNQ, I rebalance to 5.0%. And yes today was a good day, and 2014 has been solid for REITs, but there certainly are some annoying down days!
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Re: It's a good day to be heavy in REITs

Post by subham »

Against my better judgement and against the VG CFP's recommendation I tilted my portfolio by 10% to REIT and 10% SV last month. Lost over 3% and 9% respectively in a month and I learnt my lesson that I am not the kind of investor who can tolerate tracking error. Luckily I did not lumpsum, so changed my allocation for these to 5% each so that I don't have to sell them anytime soon and also tilt away to vanilla Bogle 4 fund portfolio. Phew!
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Re: It's a good day to be heavy in REITs

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Re: It's a good day to be heavy in REITs

Post by ofcmetz »

I remember having about 20% of my investments in an actively traded REIT fund in 2008/2009. Seems like it went from almost 20 to 6 something a share. It was some kind of exciting, except not in the good kind of way.
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Re: It's a good day to be heavy in REITs

Post by atwood »

Yes, REITs are having a good year and although I stopped adding to my position when Bernstein and Swedroe said they expected returns going forward to be small, I'm glad I hung on to what I already owned. They're making a good case for the benefits of diversification.

Too bad Global REITs aren't having the same kind of year.
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Re: It's a good day to be heavy in REITs

Post by fourwedge »

atwood wrote:Yes, REITs are having a good year and although I stopped adding to my position when Bernstein and Swedroe said they expected returns going forward to be small, I'm glad I hung on to what I already owned. They're making a good case for the benefits of diversification.

Too bad Global REITs aren't having the same kind of year.
Bernstein and Swedroe (both of which I greatly admire) don't know any more what asset classes are going to be better in any given year then the rest of us. No one can time the market! If they could, why aren't they billionaires like Warren Buffet. A different asset class leads the way every year, why try and guys which ones will lead the pack or follow the pack. Pick an allocation and ride it till retirement.
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Re: It's a good day to be heavy in REITs

Post by abyan »

What about those of us who are new to index fund investing, and wanted to add a 5% to 10% specific slice of REITs to our portfolios, but are worried about valuations? I've seen several of the respected voices in this forum mention even they were nervous about people getting in now. Do you still say "stop trying to time the market, and jump right in," or at some point should the valuations give pause to someone who is newly investing (at least new in index funds)?
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Re: It's a good day to be heavy in REITs

Post by abyan »

And thanks, Kevin, for the etf tip. I was wondering about that the other day, whether I could look at ETFs of European or Pacific or Emerging Indexes to get a sense of how the mutual fund might be faring that day.
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Re: It's a good day to be heavy in REITs

Post by Allocationist »

IMO, using data to compare the performance of a few sectors over a few years of market extremes seems likely to lead to flawed conclusions.
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Re: It's a good day to be heavy in REITs

Post by donaldfair71 »

abyan wrote:For those of you who hiold REITs, knowing in advance that they can be quite volatile, do you ever rebalance when they rise or drop 10% in a day, or only if overall their allocation crosses a rebalancing band? I'd imagine part of the problem is that if you hold an index fund, you don't really know what sale price you're going to end up with. But I can imagine it must be awfully tempting to rebalance when they fluctuate like that.
* For some reason, my original post didn't show.

I think, for people who only check their accounts once/month, it doesn't really show up too often that an immediate rebalance should happen on such a day. When REITS are up in such a volatile way, the volatility brings a down move in the same fashion somewhere soon. So by the time I check my account, which I do monthly, Not much has changed.
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Re: It's a good day to be heavy in REITs

Post by Aptenodytes »

InvestorNewb wrote:
John3754 wrote:The REIT index contains a 138 securities all concentrated in a single highly volatile market sector, while the total market index contains 3742 securities across all market sectors. Do you honestly believe that those two funds carry the same amount of risk?
I was just referencing Vanguard. Why do they keep the risk rating for REITs at 4 then? Why don't they upgrade it to 5 like international?

International contains 5,667 across all market sectors. It has a risk rating of 5.
You should ignore those numerical ratings. Either put together a portfolio based on recommendations of wise, disinterested experts, or brew your own. If you brew your own, rely on more complete information than those opaque, blunt, ratings.
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Re: It's a good day to be heavy in REITs

Post by Tom_T »

Forget REITs. It's a good day to be heavy in bonds. ;)
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Re: It's a good day to be heavy in REITs

Post by SDBoggled »

For someone who is well over 10% REIT, cash is looking pretty good :happy
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Re: It's a good day to be heavy in REITs

Post by Kevin M »

abyan wrote:What about those of us who are new to index fund investing, and wanted to add a 5% to 10% specific slice of REITs to our portfolios, but are worried about valuations? I've seen several of the respected voices in this forum mention even they were nervous about people getting in now. Do you still say "stop trying to time the market, and jump right in," or at some point should the valuations give pause to someone who is newly investing (at least new in index funds)?
If it were me, I would wait until a largish decline in a sub-asset class before adding a slice of it. Accuse me of market timing if you will, but from a behavioral perspective I think it works better. If you are not confident enough about adding the asset class slice to your portfolio to ignore this advice, then it's probably good advice (and the converse is true as well).

Then I would value average into it, which would result in buying more if it dropped more and buying less (or none) if it climbed higher. This will help build your behavioral bias toward buying when things go down and selling (or not buying) when they go up. Of course simply rebalancing based on your investment policy does that as well.

The last slice I added based on this approach was small international, using VSS, for which I built up my position between 8/8/2011 and 10/4/2011. I bought my first lot after a quick, steep decline, and then bought a few more lots as it declined even further. I stopped buying when it started recovering from its lows in late 2011, and it has been mostly up since then.

If VSS really tanks I probably will add some more to it. The recent decline in VSS has been similar in magnitude to the decline before I started buying it, so if I didn't own it, and wanted to add a slice, I probably would start doing so now. If I add to international, VSS will be a top contender. REITs is a completely different story; just look at a chart of VSS vs. VNQ. Whether you look at 3 months or 5 years, the story is the same: REITs have done relatively well, and VSS has not (e.g., compared to total US, VTI).

To be honest, this is a really small slice of my portfolio, and it was mostly just a desire to tinker and buy something as it was dropping in price that motivated me to add it--along with the desire to tilt a little to small-cap international; it seemed like a good idea at the time.

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Re: It's a good day to be heavy in REITs

Post by Johno »

mosu wrote:
nisiprius wrote:That's an interesting and valid observation, since I tend to regard Vanguard's risk indicators as sensible. In this case, though, in my arrogant opinion I'd say Vanguard is wrong, shame on Vanguard.
This is an unfair comparison. The 2008 crisis arose specifically from the real estate sector, so of course it would underperform the market. On the other hand, the 2000 bubble was largely due to excess euphoria for large cap (non real estate) stocks, which REITs avoided completely. The cause of the particular crisis matters. Phrased another way: based on the last 15 years, REITs are 50% less likely than the broader market to suffer a 50% drop. It happened twice for large caps and only once for REITs.
I agree it's biased to define 'risk' as just what happened in the 2008-09 period, though I do look at it as *one* benchmark in considering new investments. This comes up with other types of investments also. However what happened to REIT's in 08-09 wasn't only because the general origin of the crisis was in 'real estate' as in (values and mortgages on) single family homes, and REIT's don't have a high correlation to single family home prices* most of the time. It was also a general collapse of liquidity in non-government debt markets, and REIT's are more leveraged in general than 'regular' equities; also it was a particular loss of faith in structured financial vehicles which REIT's also arguably are. It's still a special risk episode you can't IMO use as the only metric, but it's reasonable to expect it could happen to a degree in other generally financial/banking system centered crises.

Also as anti-REIT'ers are always eager to point out, the yield spread between REIT's and regular stocks is narrower than it used to be, so there's also that aspect as far as comparing longer term volatility stats where REIT's are about the same as TSM to more recent data where they are (including 08-09) a good deal more volatile. IOW a general 'the world may have changed a bit' consideration, not to say the narrowing of the yield spread has *caused* REIT's to be more volatile.

I have a REIT allocation based on thinking it was a good idea many years ago. It's been an OK idea, but regardless of how OK exactly, the capital gains are too big to consider dumping it if the only evidence is that the shares went down more than regular stocks (and also came roaring back) in one particular crisis. And it's not that big.

*they don't have a high correlation to underlying apartment or commercial building prices either, with data as far as I've been able to gather, they correlate more closely to (other) stocks on a monthly basis than anything else.
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Kevin M
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Re: It's a good day to be heavy in REITs

Post by Kevin M »

Johno wrote: *they don't have a high correlation to underlying apartment or commercial building prices either, with data as far as I've been able to gather, they correlate more closely to (other) stocks on a monthly basis than anything else.
It's somewhat dated, but according David Swensen (2005), of Yale Endowment fame, the correlation is decent over longer time periods, and he does (did?) consider the Vanguard REIT fund a reasonable proxy for owning commercial real estate. He attributes the lower short-to-intermediate-term correlation to variation of discount/premium of REITs to underlying asset value. Seems kind of similar to varying PE ratios for non-REIT stocks.

Speaking of Swensen, the performance of REITs over recent years supports the point about the nature of REITs changing. In 2005, Swensen characterized the risk/return tradeoff for REITs as somewhere between stocks and bonds; clearly not the case in recent years. I view my REIT fund more as a potentially very volatile asset that has presented interesting opportunities to reap a rebalancing bonus several times over the last few years, and I suspect will do so again in the future.

I just eyeballed a 1-year chart of VNQ (REIT), VTI (TSM), and VBR (SV), and it looked like pretty low correlation of VNQ to VTI--even less than for VTI/VBR. Checked, and sure enough, VTI/VNQ correlation over last year is 0.56. Over last 10 years it is 0.80. Ten-year and 1-year correlation of VTI/VBR is 0.95, so from a correlation perspective REIT has been the better diversifier than small-cap value. Looking at rolling correlations, VTI/VBR correlation clearly has been falling for the last 2-3 years.

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Re: It's a good day to be heavy in REITs

Post by Johno »

Kevin M wrote:
Johno wrote: *they don't have a high correlation to underlying apartment or commercial building prices either, with data as far as I've been able to gather, they correlate more closely to (other) stocks on a monthly basis than anything else.
It's somewhat dated, but according David Swensen (2005), of Yale Endowment fame, the correlation is decent over longer time periods, and he does (did?) consider the Vanguard REIT fund a reasonable proxy for owning commercial real estate. He attributes the lower short-to-intermediate-term correlation to variation of discount/premium of REITs to underlying asset value. Seems kind of similar to varying PE ratios for non-REIT stocks.
I used quarterly returns for the S&P/GRA indices for eastern US apartments and retail (since that's where I invest in real estate besides REIT's), Cash Shiller NY index for single family (same reason), VGSLX as 'REIT' since that's what I own, and also the main funds I actually own for other financial asset categories, and found for 2004-11, quarterly returns, VGSLX's correlations to be: TIPS 11%, fixed high grade 20%, US stock (Russell 1000 fund) 79%, developed stocks 76%, emerging stocks 66%, single family houses 39%, apartments 6%, retail space 16%. It didn't vary much slicing and dicing the periods, pretty sure it's not a gross data error.

I certainly accept that this finding could be of limited meaning, vs. 'in the long run' (where we'll all be dead :D ), but seriously I could see the point about longer run correlation being more meaningful and meaningful different (subject to the usual problem of getting lots of non-overlapping long periods where the world is really the same). At one end of the spectrum (though I don't gather you're there and I'm not) some people take histories of short term correlations very seriously (as some posts above in this thread show) and the theoretical basis for that is undermined by accepting that frequency could make a big difference in return correlation, but I accept that it might. I certainly don't take at 100% face value the apparent reduction in prospective portfolio return variance I've supposedly achieved by increasing my direct RE allocation since I ran those numbers, and in the real world there's not even any such thing as a verifiable monthly price for a particular building. And even though those S&P indices and Case Shiller are much more diversified and sophisticated than my idea of the value of my real estate holdings, the data still doesn't appear in anything like real time (like a stock price) and AFAIK people in the actual real estate market are not on tenterhooks awaiting the latest S&P/GRA number, (national) Case Shiller has gained a bit more weight as a potentially market moving number, in trend over time at least. So in that sense it's not a big surprise if REIT's generally follow stocks around month to month or Q to Q, what else are they going to follow? :wink: So on the converse side saying that high short term return correlation of stocks and REIT's proves REIT's are 'just stocks', I don't really buy that either.
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