REITS - VGSIX - Down 6 2/3 % in 2 days - buy now?

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elgob.bogle
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REITS - VGSIX - Down 6 2/3 % in 2 days - buy now?

Post by elgob.bogle »

Hi:

I've been anxious to get some VGSIX for my portfolio. I see that it has dropped 6 2/3% in two days. Is now a good time to stock up on VGSIX???

elgob
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gdetore
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timing

Post by gdetore »

If anyone knew the answer to your question he/she would be rich. Nobody knows when it is a good time to buy.
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Post by Sheepdog »

You won't find many here who try to time. I don't know anyone who can. Either we have it as part of our allocation, or we don't. We buy if we do.
(I do have REITs and have had for over 8 years.)
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Re: REITS - VGSIX - DOWN 6 2/3 % IN 2 DAYS - BUY NOW????

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...
Last edited by jh on Thu Jul 17, 2008 2:10 pm, edited 1 time in total.
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Re: REITS - VGSIX - DOWN 6 2/3 % IN 2 DAYS - BUY NOW????

Post by tfb »

elgob.bogle wrote:Hi:

I've been anxious to get some VGSIX for my portfolio. I see that it has dropped 6 2/3% in two days. Is now a good time to stock up on VGSIX???

elgob
Yes, if you think the price will go up and you will buy some in the future anyway. You are just buying them early. No, if you think the price will go down and you will be able to buy them at a lower price later. As you can see, it comes to guessing the price movement. I have no idea which way it will go. Otherwise I'll be a trader - buy low, sell high.
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Post by Easy Rhino »

I bought the ETF twin, VNQ, a few months ago. It was my first REIT purchase ever, and the prices had been falling like a knife. I was terrified, and had pretty much resigned myself to a lengthy period of underperformance until things "normalized". However, it was only going to be about 6% of my portfolio, so I sucked it up and just bought it.

Miraculously, it's up a bit so far.

If the REIT is going to be a large portion of your portfolio (hopefully not TOO large), or a large amount in absolute dollars, then you may want to dollar cost average it. Otherwise, you might as well bite the bullet.
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Post by dave.d »

Adjusted yield on the ETF is about $2.80/share as of 4/30/2008, computed per the note on the Vanguard listing times the closing price from that day, thus about 4.43% at today's close on the ETF, and slightly less on the open-ended fund. The theory of REIT's is that they should behave (long-term) something like an inflation-protected bond, so that looks like an attractive yield compared to TIPS. And a little better than a few days ago, although there's no reason to think the change tells you anything the yield doesn't.

The extra yield compensates you for the extra risk to your principal. So you just have to ask yourself... do you feel lucky?
Value-based allocation.
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Post by elgob.bogle »

Thanks for the replies. My target is 100K (~10%) of portfolio - all in tax- deferred. Yes - I plan to hold the shares for a long time. VGSIX is projected to be an income-generator during retirement in 4-7 years from now. The price seemed attractive because it is near the 2005-2006 price level.

I was looking for guidance because I know nothing about the real estate market. It is interesting/foreboding that commercial real estate busts follow resideintial busts. The current yeild of over 4% is good, and I am glad to hear about the inflation hedging properties of REITS.

I realize that my initial entry into REITS is market timing, but Bogleheads are entitled to a one-time adjustment to their portoflio - no? John Bogle has done the same. I am leaning towards a bite-the bulet approach, thinking optimistically again that "the worst is over"

Thanks for you ideas - and any additional thought will be appreciated.
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Re: REITS - VGSIX - DOWN 6 2/3 % IN 2 DAYS - BUY NOW????

Post by woof755 »

elgob.bogle wrote:Hi:

I've been anxious to get some VGSIX for my portfolio. I see that it has dropped 6 2/3% in two days. Is now a good time to stock up on VGSIX???

elgob
This decision has nothing to do with time. It's up 3% this year, despite recent losses.

If you want to own REITs, and will hold them for 20 years or so, buy now. Or buy next month. Just buy in. Real estate market looks flimsy to you? Buy in slowly, maybe catching some more "bargains" over the next few months. If you think you'll lose your nerve to buy your full target allocation if you buy in for 6 months, and it's still going lower, than buy now.

It's really a matter of whether you want to own this stuff or not, and your age / how long you intend to hold it. Has nothing to do with what REITs are going to do over the next year, except how that performance will affect your investing behavior.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing
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Post by BlueEars »

If an asset class does real well over several years and then starts to stumble my tendancy is to watch for a major washout. Somehow it doesn't feel to me like that point has been reached yet. Since I don't have anything in REITs directly and no current plans to do so I'm just a casual observer. Would think you would want to fund maybe small value before putting $'s into REITs. I'll be interested to see how this all plays out over the next year or so.
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Stats on REIT

Post by Trev H »

1972-2007

100% TSM
=======
10K Growth
438,956.02
CAGR
11.08
StDev
17.25
Sharpe
0.3754


100% REIT
=======
10K Growth
790,779.74
CAGR
12.91
StDev
17.25
Sharpe
0.4794


If you step back and look at performance details, makes you question TSM rather than REIT.

Correlations

.5232 TSM & REIT
.2864 International Market & REIT
.1164 InterTerm Treasury & REIT

They mix well with other major components (low correlation).

Excellent component to hold in the 10-20% of Equities range if you ask me.


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Post by BlueEars »

Trev, do the recent years bias your results in favor of REITs? How about different 10 yr periods for example? I don't know the answer myself but from L. Swedroe's book for the period 1975-2003 he found that adding an 8% REIT component reduced CAGR but also reduced STDDEV. I personally found it an underwelming argument for REITs.
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Post by malloc »

Why not research WHY reits dropped (Leihman Bros?) before you decide whether it will continue or rebound?
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Post by Valuethinker »

Les wrote:If an asset class does real well over several years and then starts to stumble my tendancy is to watch for a major washout. Somehow it doesn't feel to me like that point has been reached yet. Since I don't have anything in REITs directly and no current plans to do so I'm just a casual observer. Would think you would want to fund maybe small value before putting $'s into REITs. I'll be interested to see how this all plays out over the next year or so.
And wise.

Tech is still not back to where it was in 2000.

Commercial RE follows a 'supercycle' which is quite long (at least 14 years). This has to do with loose credit allowing overbuilding, then very long periods when offices and stores sit empty, overhanging the market (there's a website where you can look at pictures of abandoned Orange County shopping malls).

If you look at the last 3 years of the 1980s, when stocks shot ahead (despite the 1987 Crash), real estate did badly (a function of changes in the tax laws, massive overbuilding, and worries re the economy) and then had a dreadful 1990-91. There were a couple of years of double digit returns, then, from memory, and then a long slow 90s.

REITs are more geared to the US domestic economy than stocks (because their operations are by definition nearly 100% US, and in particular lots of US retail, and the US has the most retail square feet per person of any country in the world).

REITs are also not 'cheap' right now. Look at the yield. Yes, 4%, but they have yielded 8% in the mid-late 90s.

If someone is building a position in REITs, my view is they should seek to do so quite slowly.
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Les...

Post by Trev H »

.
Les,

That is correct. There are select periods where holding a REIT component did not increase CAGR, but only reduced Volatility. You could say the same thing about just about any portfolio component depending on the timeframe you look at.

Holding the Market(s) and adding REIT + SV at 1:1 or 1:2 ratio = very likely to both increase returns and reduce volatility.

Below is a look at 3 Portfolio's for the full span of 1972-2007 showing the year-to-year growth of 10K stats.

US = Cap Weighted US Market (CRSP D1-10/VTSMX)
IN = International Market (EAFE85/EM15/VGTSX)
RE = REIT (NA REIT/VGSIX)

1972-2007 (yearly rebalancing)

Code: Select all

........US/IN...........US/RE/IN........US/RE/IN
Port....50/50...........45/10/45........40/20/40
=================================================
Year....10,000.00.......10,000.00.......10,000.00
1972....12,660.00.......12,474.00.......12,288.00
1973....10,571.10.......10,428.26.......10,285.06
1974.....7,907.18........7,839.97........7,771.39
1975....10,836.79.......10,605.52.......10,374.80
1976....12,418.97.......12,503.91.......12,574.26
1977....13,282.08.......13,566.11.......13,836.72
1978....15,945.14.......16,153.85.......16,341.16
1979....18,161.52.......18,754.62.......19,331.60
1980....23,183.18.......23,879.32.......24,551.13
1981....22,638.37.......23,517.55.......24,384.18
1982....24,890.89.......26,131.52.......27,378.56
1983....30,690.47.......32,410.93.......34,157.49
1984....32,593.28.......34,896.84.......37,279.48
1985....47,080.99.......49,523.85.......51,960.14
1986....67,325.81.......69,640.44.......71,829.70
1987....76,280.14.......77,725.70.......78,955.21
1988....94,728.50.......95,693.16.......96,363.25
1989...117,382.82......117,131.78......116,495.46
1990...101,354.19......100,933.04......100,181.44
1991...128,876.92......129,203.88......129,097.81
1992...129,830.61......131,950.75......133,631.72
1993...162,161.68......164,123.32......165,518.92
1994...166,718.42......168,799.19......170,299.11
1995...204,841.93......206,121.20......206,664.10
1996...234,313.05......240,086.93......245,041.21
1997...269,717.75......277,242.78......283,860.64
1998...322,123.91......321,199.63......318,718.73
1999...408,662.49......397,563.23......384,642.51
2000...355,168.57......361,202.10......364,633.40
2001...299,904.34......315,080.20......328,250.28
2002...245,861.58......265,162.05......283,391.60
2003...333,990.66......360,157.68......384,862.79
2004...389,700.31......425,303.00......459,895.65
2005...431,690.51......471,603.61......510,474.97
2006...522,669.29......577,594.16......632,345.76
2007...577,575.70......622,695.60......664,671.28
=================================================
.......10K Growth......10K Growth......10K Growth
.......577,575.70......622,695.60......664,671.28
.......CAGR............CAGR............CAGR
.......11.93...........12.16...........12.36
.......StDev...........StDev...........StDev
.......17.43...........16.52...........15.77
.......Sharpe..........Sharpe..........Sharpe
.......0.4212..........0.4501..........0.4775
.......1973-1974.......1973-1974.......1973-1974
.......-37.54..........-37.15..........-36.76
.......2000-2002.......2000-2002.......2000-2002
.......-39.84..........-33.30..........-26.32
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And...

Post by Trev H »

.
Les,

I checked out the period 1975-2003

1975-2003 (yearly rebalancing)

50% US Market
50% International Market
=================
10K Growth
422,388.95
CAGR
13.78
StDev
16.82
Sharpe
0.52


45% US Market
10% REIT
45% International Market
=================
10K Growth
459,386.62
CAGR
14.11
StDev
15.63
Sharpe
0.57


40% US Market
20% REIT
40% International Market
=================
10K Growth
495,230.43
CAGR
14.40
StDev
14.60
Sharpe
0.62


Must have been some other period because adding REIT during this timeframe worked nicely.

Most of the time when someone quotes a period where REIT were not beneficial they end with 1999. REIT had negative returns 1998 and 1999 and of course US Market surged to the top of the bubble at that point so if you look at just about any period ending then, REIT does not look so appealing especially if the rest of the portfolio is mostly lumped into US Market.


Trev H
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Post by nisiprius »

I believe that:

1) One should never make any financial moves quickly. If possible, always wait a month between making the decision and executing it. And make the change slowly, a little bit at a time, taking a couple of years to complete it.

2) One should not make any changes in one's asset allocation unless one can articulate some coherent reason for making the change THAT GOES BEYOND

a) an observation of recent price movements;

b) a repetition of advice you've heard or read somewhere, together with the reasons you heard.

With regard to "repetition of reasons you heard," what I mean is that if someone says VGSIX is a good diversifier because it doesn't move in parallel with the general stock market, you should at least take the time to overlay and compare the growth-of-$10,000 charts and decide for yourself whether it looks that way to you.
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Post by BlueEars »

Trev, thanks for your data presentation. It certainly makes REITs look more attractive for the very long haul. Personally I'm concerned most with the next 10 yrs since I'm retired so will put more emphasis in "short term" results. Larry's data was shown on p. 158 of The Only Guide to A Winning Investment Strategy You'll Ever Need. So as you can see from the title we don't need any more information on these subjects :wink: . He added an 8% REIT component to a portfolio that included:
8% SP 500
8% US LV
8% US S
8% US SV
10% Intl LV
10% Intl S
40% 2yr fixed income

With the REIT addition his CAGR dropped from 14.5% to 14.3% but STDDEV went from 9.9% to 9.4% and it increased Sharpe Ratio by 2%.
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Post by Valuethinker »

Les wrote:Trev, thanks for your data presentation. It certainly makes REITs look more attractive for the very long haul. Personally I'm concerned most with the next 10 yrs since I'm retired so will put more emphasis in "short term" results. Larry's data was shown on p. 158 of The Only Guide to A Winning Investment Strategy You'll Ever Need. So as you can see from the title we don't need any more information on these subjects :wink: . He added an 8% REIT component to a portfolio that included:
8% SP 500
8% US LV
8% US S
8% US SV
10% Intl LV
10% Intl S
40% 2yr fixed income

With the REIT addition his CAGR dropped from 14.5% to 14.3% but STDDEV went from 9.9% to 9.4% and it increased Sharpe Ratio by 2%.
Ask yourself the question:

if an asset has yielded 8% in the last 10 years, and now yields 4%, and the primary reason for holding that asset is income (because of the nature of real estate, ie that the money is made from rental income) then is it 'cheap'?

Then ask yourself what has changed that might make it cheap (the answer is, of course, bond yields and inflation, the comparator has also fallen much lower)?

This is a market timing view, and anethema around here.
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Post by BlueEars »

Valuethinker, I agree with your view. From the latest Value Line:
Prior to the dramatic decline, REITs were trading at price-to-free_cash_flow multiples that were above historical average. Moreover, the dividend yields of most REITs were no longer attractive compared with other, less risky, fixed-income investments.
For instance, Weingarten Realty had a low in price/FFO of 8.9 in 2000 and in 2006 price/FFO = 14.3 . In 2007 that ratio was 14.0.

I would add that the rental income may be at the heart of RE investing but everyone I've known including myself has been in it for the appreciation potential fueled by leverage -- perhaps too much exposure on my part to the Silicon Valley RE market (which I'm not a part of any more).
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Post by financialguy »

Valuethinker wrote:Ask yourself the question:

if an asset has yielded 8% in the last 10 years, and now yields 4%, and the primary reason for holding that asset is income (because of the nature of real estate, ie that the money is made from rental income) then is it 'cheap'?

Then ask yourself what has changed that might make it cheap (the answer is, of course, bond yields and inflation, the comparator has also fallen much lower)?

This is a market timing view, and anethema around here.
It's important to look at the context. When REITs yielded 8%, the S&P 500 was returning 20+% a year. So REITs needed to yield more in order to attract capital during the large growth bubble.

The financial literature talks about how the risk premium may have gone down in the last half of the 20th century, giving a one-time free lunch boost to everyone's equity portfolio. This makes a lot of sense if you look at the S&P 500's annual returns from 1950 to 1999 (13.6% on average).

Today, however, the general attitude is that this risk premium shrinkage is over and we live in an era of lower returns. The accepted formula for S&P expected returns is real GDP growth plus dividends plus inflation.

So is 4% in a low-return era as good as 8% in a high-return era? Maybe so.
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Post by gassert »

Clearly REITs are very subject to investor sentiment and as such are tough to time. Last year they were trading at a 20% premium to FMV, earlier in this yr they were trading at a 20%+ discount. I havent looked at the recent valuations, but considering previous undervalue I dont think it's a terrible time to aquire if its in line with your long term plan. When I saw them up almost 10% ytd a couple weeks ago I laughed, but now is more in line with reality. IMO - they're fairly valued. And BECAUSE they are factoring investor emtion, there's no way to time
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Rebalancing REITs

Post by killoggs »

I have had my portfolio on autopilot for a long time but am taking the initiative and educating myself in investing. One of the alarming things I noticed is that the REIT component in my portfolio now comprises 20%! All of the REIT growth in the past years, while salutary at the time, had destabilized my portfolio and it is in need of rebalancing.

Too bad I didn't watch more closely when REIT was 5% over allocated, I could have rebalanced at the perfect time. I'm not a market timer mind you, just a believer in contrary investing, and rebalancing seems the perfect way to round off edges and sell high and buy low.

Now I just need to figure out how to rebalance back down to 8-10% REIT without harvesting the recent REIT losses. Any thoughts?
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Post by Valuethinker »

financialguy wrote:
Valuethinker wrote:Ask yourself the question:

if an asset has yielded 8% in the last 10 years, and now yields 4%, and the primary reason for holding that asset is income (because of the nature of real estate, ie that the money is made from rental income) then is it 'cheap'?

Then ask yourself what has changed that might make it cheap (the answer is, of course, bond yields and inflation, the comparator has also fallen much lower)?

This is a market timing view, and anethema around here.
It's important to look at the context. When REITs yielded 8%, the S&P 500 was returning 20+% a year. So REITs needed to yield more in order to attract capital during the large growth bubble.

The financial literature talks about how the risk premium may have gone down in the last half of the 20th century, giving a one-time free lunch boost to everyone's equity portfolio. This makes a lot of sense if you look at the S&P 500's annual returns from 1950 to 1999 (13.6% on average).

Today, however, the general attitude is that this risk premium shrinkage is over and we live in an era of lower returns. The accepted formula for S&P expected returns is real GDP growth plus dividends plus inflation.

So is 4% in a low-return era as good as 8% in a high-return era? Maybe so.
Hi

You make a good point.

I can't shake the feeling that, just like in 1999, when ignoring what the PE of the market was telling you (stocks as expensive as they have ever been) we shouldn't ignore what the REIT yield is telling us (cheap, but not that cheap).

In the end office buildings are about long term rental returns with some inflation content. Hard to get there if your rental return is only 4%.
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Re: Rebalancing REITs

Post by White Coat Investor »

killoggs wrote:
Now I just need to figure out how to rebalance back down to 8-10% REIT without harvesting the recent REIT losses. Any thoughts?
Welcome to the forum!

I'm a little concerned about your use of "harvesting...losses."

Tax loss harvesting is the act of selling a security in a taxable account for a loss, then either buying something similar right away or rebuying the same security 31 days later.

Unless the transaction costs cancel out the savings, you should ALWAYS want to harvest losses. It isn't like you can't do it again if the security drops some more.

I hope you don't hold your REITs in a taxable account; they are very tax-inefficient and a pain in the butt to keep track of when in a taxable account.

I suspect you meant to use the term "lock in my losses" which is another frequently used phrase that usually shows a lack of understanding of behavioral financial principles. The money is lost whether you "lock it in" or not. If you wouldn't buy today what you currently own then you need to sell it and buy what you want (barring certain tax situations where it is a better idea to hold onto what you have.) If you only want 5-10% REITs and you hold 20%, I would rebalance as soon as possible. You have likely made a great deal of money letting this one ride and I wouldn't press your luck any further in hopes that they go back up the 6% they lost this week.
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Re: REITS - VGSIX - Down 6 2/3 % in 2 days - buy now?

Post by MossySF »

elgob.bogle wrote: I've been anxious to get some VGSIX for my portfolio. I see that it has dropped 6 2/3% in two days. Is now a good time to stock up on VGSIX???
After another 1% drop since you've posted this question, VGSIX is now at $20.69. On the otherhand, VGSIX was at $18.83 in January and $18.92 in March. Question is if you think VGSIX is attractive now, why was it not attractive back in January or March?

Of course, this is a rhetorical question because I know the answer -- most people (including myself) struggle with this situation. When things are dropping and dropping, you think there is no bottom so you never end up buying. You wait until it starts going back up and then you think "damn, I missed the bottom" and try to wait for another correction.

The answer is turn off your brain -- buy on a regular basis, rebalance when you hit your thresholds. Your brain is fooling you -- we've evolved to try to pick up patterns to survive Darwin's world but those same instincts do not work on the stock market.
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Post by elgob.bogle »

MossySF:

Good Question - I knew nothing about REITS until I became a member of this forum in late February. It has taken me several months to try to learn about them. The responses to my query have been excellent. Now I am even more knowledgeable but less willing to jump in until I learn more. On the other hand, now might be a good time to adjust my AA before the recession really sets in. I like the idea of having an asset class that does not correlate well with my core holdings.

Thanks for everyone's coments

elgob
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Re: Rebalancing REITs

Post by killoggs »

EmergDoc wrote:
Welcome to the forum!

I'm a little concerned about your use of "harvesting...losses."

...

I suspect you meant to use the term "lock in my losses" which is another frequently used phrase that usually shows a lack of understanding of behavioral financial principles. The money is lost whether you "lock it in" or not. If you wouldn't buy today what you currently own then you need to sell it and buy what you want (barring certain tax situations where it is a better idea to hold onto what you have.) If you only want 5-10% REITs and you hold 20%, I would rebalance as soon as possible. You have likely made a great deal of money letting this one ride and I wouldn't press your luck any further in hopes that they go back up the 6% they lost this week.
Thanks EmergDoc! Yes, I actually meant "lock in" losses since this is my 401(k). The 20% REIT situation is an unfortunate one, but I would suspect is common for those who carelessly let their portfolio go a couple (or three?) years before rebalancing. A part of me wants to wait until REITs bounce back a little before selling and rebalancing, but I could wait a long time before that happens and then I'm missing gains that I otherwise would have made with a more even AA. It's a sticky wicket all right.
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Post by elgob.bogle »

DM - Random Walk Down Wall Street - recommends 10% REITS (total portfolio) pre-retirement and then 15% REITS by mid-60s age.

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Post by MossySF »

elgob.bogle wrote:Now I am even more knowledgeable but less willing to jump in until I learn more. On the other hand, now might be a good time to adjust my AA before the recession really sets in. I like the idea of having an asset class that does not correlate well with my core holdings.
I suspect for the next few years, REITs will correlate rather well with core holdings since dropping real estate values and defaulting mortgages are prime reasons for the overall market volatility. So if you are going from 60% stocks to 50% stocks+10% REITs, timing is not that big of a deal. Moving from one dropping class to another won't net you much of a difference so just setup an automated schedule and fire-forget.
brswif00
Posts: 226
Joined: Sat May 17, 2008 8:20 am

Post by brswif00 »

The 20% REIT situation is an unfortunate one,
It actually isn't unfortunate, as another earlier reply said. If you had rebalanced earlier, you would not only have missed the recent drop, you would also have missed the epic, real-estate-bubble-fed rise that carried REITs to 20% of your AA in the first place. This is another behavioral econ truism - losses hurt disproportionately more than the satisfaction derived from gains.

If you consider both the gains and the losses resulting from not rebalancing to 10% a few years ago, you will have come out ahead and it is not unfortunate at all. Comparing the price now to a past top and assuming you would somehow have picked that exact moment to rebalance guarantees continual disappointment.
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bolivia
Posts: 333
Joined: Mon Jul 02, 2007 9:11 pm

Post by bolivia »

After another 1% drop since you've posted this question, VGSIX is now at $20.69. On the otherhand, VGSIX was at $18.83 in January and $18.92 in March. Question is if you think VGSIX is attractive now, why was it not attractive back in January or March?
VGSIX is now at $19.87. That's almost a $10 drop from January 2007.

So the questions remain:

1) How low will it go?!
2) If you're planning to buy, when ya gonna do it ?!
3) Which crystal ball are you using?!

bolivia
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