reit allocation

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star9
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reit allocation

Post by star9 » Wed Sep 28, 2016 9:40 pm

Do you figure a REIT into your stock allocation or your bond allocation? I've seen it done both ways in investment books.
Or should a REIT be allocated as a separate entity in a portfolio? Not a stock and not a bond but a separate fund.
It seems to me that a REIT is a stock so should be part of your portfolio's stock allocation.
Opinions sought.

Would also be interesting to hear what allocation people give to REITS (if at all) and why.

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StevieG72
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Re: reit allocation

Post by StevieG72 » Wed Sep 28, 2016 9:47 pm

Good question. I originally thought of it as its own individual asett class.

I calculate it as part of my stock percentage now since that is what Vangaurd does.


Seems like fuzzy logic to allocate it as a bond.
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Re: reit allocation

Post by DoctorStrange » Wed Sep 28, 2016 10:05 pm

The last two books I read both included it in the equities (stocks) portion of your portfolio. I believe Rick Ferri's rule of thumb is no more than 8% of your equity portion in REITs. I've seen as low as 8% from Rick, up to 15% in The Four Pillars of Investing (someone please correct me if I'm wrong).

alex_686
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Re: reit allocation

Post by alex_686 » Wed Sep 28, 2016 10:39 pm

How finely you want to chop your asset pie is up to you.

In a 2 asset world, REITs are more stock like than bond like in terms of return and risk.

In a 3 asset world REITs become their own class. They act more differently from large cap stocks than small cap or foreign.

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Re: reit allocation

Post by pascalwager » Thu Sep 29, 2016 2:23 am

star9 wrote:Do you figure a REIT into your stock allocation or your bond allocation? I've seen it done both ways in investment books.
Or should a REIT be allocated as a separate entity in a portfolio? Not a stock and not a bond but a separate fund.
It seems to me that a REIT is a stock so should be part of your portfolio's stock allocation.
Opinions sought.

Would also be interesting to hear what allocation people give to REITS (if at all) and why.
David Swensen considers REIT a hybrid, part stock and part bond.
Preferred AA: Total US and foreign stock markets and short-term Treasury fixed income

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Re: reit allocation

Post by Valuethinker » Thu Sep 29, 2016 5:52 am

Given the volatility REIT index showed during the 2008-09 crash, I would suggest treating it as equity.

It is true that the total return of REITs has a much greater percentage of dividend income (v. price return) than other sectors. And that particularly with regard to correlation with inflation, REITs should behave differently to stocks in general.

But if you look at the volatility of the thing, mentally you want to put it in the stock basket.

I think David Swensen goes up to 20% in retirement for REITs. Burton Malkiel as you say 15%. These are big numbers. Given the historic volatility, I would suggest most people would not want to be above 10% in REITs.

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Re: reit allocation

Post by nisiprius » Thu Sep 29, 2016 6:06 am

pascalwager wrote:
star9 wrote:Do you figure a REIT into your stock allocation or your bond allocation? I've seen it done both ways in investment books. Or should a REIT be allocated as a separate entity in a portfolio? Not a stock and not a bond but a separate fund.
It seems to me that a REIT is a stock so should be part of your portfolio's stock allocation.
Opinions sought. Would also be interesting to hear what allocation people give to REITS (if at all) and why.
David Swensen considers REIT a hybrid, part stock and part bond.
1) David Swensen may "consider" them to be anything he likes, but they are stocks.

2) Strong words, but: it's crazy to consider them bonds. During 2008-2009, I was personally holding all three: stocks (Vanguard Total Stock Index Fund, VTSMX, orange), bonds (Vanguard Total Bond Index Fund, VBMFX, green), and REITS (Vanguard REIT index fund, VGSIX, blue) and it was very memorable.

Source
Image

Anyone who can look at this chart and say that the blue line is the same kind of thing as the green line is... crazy.

And even admitting that 2008-2009 were special, in my opinion anyone who can look at it and say "the blue line is a hybrid that is somewhere in between the orange line and the green line" is... um... hey, exactly when did David Swensen say so?

3) The word "bond" has a confusingly broad range of meanings, but when we say bond often we are talking about investment-grade bonds. An investment-grade bond has two characteristics:
a) A guaranteed
b) income stream.

People are way, way, way too eager to tout something that isn't a bond as being "like" a bond simply because it has the "income stream" characteristic without the "guaranteed" characteristic.

Anyone who purchases a REIT in any form is a participant in the upside and downside risks of a business. You can say that a REIT is an unusual kind of business, and that REITS are more different from other sectors than other sectors are from each other, but it's still a business and you're have an equity in it.

4) When I held shares of the TIAA Real Estate "account," which made direct investments in real estate and showed you the names and addresses of all the buildings it owned in the quarterly reports--in the early years it actually showed you pictures, which was cool--I created a category of its own, called "real estate." That was probably sensible. When I consolidated to Vanguard, sold the TIAA RE, and bought VGSIX with the foolish idea that it was similar, I still classified it as "real estate." That was probably wrong. In any case, having classified it as "real estate" I never really knew what to do with it other than stare at the pie chart, and fortunately the pie slice was small enough that I didn't think I needed to think about it.

5) At the time, Burton Malkiel was strongly recommending "real estate" in A Random Walk Down Wall Street and his words were something like "it has similar risk and return to stocks, but a low correlation with them." So according to the conventional wisdom, REITS are indeed like stocks but are good diversifiers in the MPT, efficient frontier, slice-and-dice sense.

6) I never had a big percentage in REITS, and even though it was tiny, watching it during 2008-2009 was exquisitely painful. I didn't bail, but as soon as my calculations showed that I was back to even in my VGSIX account, I exchanged VGSIX for Total Stock and never looked back. OK, I've looked back. I don't want to defend this as having been the right thing to do, I'm just reporting what I personally actually did.

7) You have to look at 2008-2009. It happened. You can say "nisiprius is influenced by recency, fighting the last war, is a fraidycat," etc. etc. Yep. You can say "it cannot possibly happen again." Nope. You can say "So, let's say 10% REITS, as in the Bill Schultheis Coffeehouse Portfolio. Even if something like 2008-2009 happens again, I can tolerate that in 10% of my portfolio." Maybe.
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Re: reit allocation

Post by alex_686 » Thu Sep 29, 2016 6:32 am

Valuethinker wrote:Given the volatility REIT index showed during the 2008-09 crash, I would suggest treating it as equity.
I don't think this is sufficient evidence. In 2008 the real estate market blew up, crashing the market. In 1979 the bond market blew up, crashing the market.
Valuethinker wrote:3) The word "bond" has a confusingly broad range of meanings, but when we say bond often we are talking about investment-grade bonds. An investment-grade bond has two characteristics:
a) A guaranteed
b) income stream.
If it waddles like a duck, and quakes like a duck.....

Asset classes are defined by how things act, not what they legally are. Preferred stock is technically a equity but it is always classified as fixed income. a.k.a., bonds. REITs don't act like stocks or bonds.

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Re: reit allocation

Post by nisiprius » Thu Sep 29, 2016 6:42 am

This sort of comparison is always difficult to make and always contentious. In 1998, Bill Schultheis published The Coffeehouse Investor, which presented a simple portfolio which nevertheless incorporated the conventional wisdom of the day, including small tilts, value tilts, a 10% international stock allocation, and 10% REITs. Since it was published, with specifics--and either in the book or elsewhere he named specific funds as being proper implementations--we can look at how it did since publication. This is important, because when someone declares a specific portfolio in print, you know they are committed to it. It is too easy to say in 2016 "I designed this portfolio in 1998," and the reader doesn't know how many they might have also designed but decided not to write about.

I'm going to look at three portfolios.

Portfolio 1 is Coffeehouse.

Portfolio 2 is Coffeehouse without REITs. The difference between 1 and 2 shows the effect of REITS.

Portfolio 3 is a simple three-fund stock/international stock/bonds allocation, same allocation as Coffeehouse, but without tilts or REITs. The difference between 3 and the others show the effect of the conventional wisdom of 1998 about tilts and so forth.

Over the specific time period 1998 to the present, and comparing the Sharpe ratios (risk-adjusted return and not just raw return), it is clear that, yes, Coffeehouse with REITS outperformed Coffeehouse without REITS, and that both outperformed a three-fund portfolio without tilts.

Source
Image

(This is sour grapes, because personally I don't tilt, but I have to add, though, that virtually all of the improvement is attributable to 1998-2002, and if you change the starting year to 2003 the Sharpe ratios become virtually identical. This is another way of saying that the time period from 2000-2002 was very interesting but perhaps special. During those years, the market as a whole was declining steeply, but several of the much-recommended slice-and-dice classes like small value and REITS were rising. As a result, these classes gloriously fulfilled the expectation of "low correlation" with the stock market. What to make of this is hard to say. They certainly didn't repeat that performance in 2008-2009, but that doesn't invalidate the claim of "low" correlation).

Although the previous paragraph can be dismissed as sour grapes, it does illustrate something important. All of this performance data is usually "bursty" and is a collection of special moments in time... and thus overall CAGRs and Sharpe ratios are always highly endpoint dependent, because averages even a longish period of time can be hugely dependent on whether or not the endpoints just happen to include or exclude some unusual moment.
Last edited by nisiprius on Thu Sep 29, 2016 6:50 am, edited 1 time in total.
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Re: reit allocation

Post by Valuethinker » Thu Sep 29, 2016 6:45 am

alex_686 wrote:
Valuethinker wrote:Given the volatility REIT index showed during the 2008-09 crash, I would suggest treating it as equity.
I don't think this is sufficient evidence. In 2008 the real estate market blew up, crashing the market. In 1979 the bond market blew up, crashing the market.
Valuethinker wrote:3) The word "bond" has a confusingly broad range of meanings, but when we say bond often we are talking about investment-grade bonds. An investment-grade bond has two characteristics:
a) A guaranteed
b) income stream.
If it waddles like a duck, and quakes like a duck.....

Asset classes are defined by how things act, not what they legally are. Preferred stock is technically a equity but it is always classified as fixed income. a.k.a., bonds. REITs don't act like stocks or bonds.
Great to be credited for Nisi's thoughts but the latter were his ;-).

There are lots of reasons to be careful of REITs and not to treat them as bonds. I could argue their *run up* in 2000-03 also showed impressive volatility, it just happened to be in the investor's favour.

Bond markets wobble but whilst a 1994 style crash is certainly possible, without double digit inflation I doubt a 1979 style one is.

If you look at the history REITs are a volatile sector. And the actual performance of RE companies is linked to the economy very directly. Interestingly there are warnings from authoritative people that a bit of a bubble has grown up in US CRE lending at the moment.

I agree they have diversification characteristics over stocks and bonds. I just caution against treating them like bonds.

BTW as income stocks and interest sensitives, if interest rates rise they will probably get hit harder than stocks as a whole. So bond-like, but at just the wrong moment ;-).

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Re: reit allocation

Post by telemark » Thu Sep 29, 2016 7:19 am

Swensen writes about complex ideas with precision and thus is worth studying carefully. When he writes
Real estate assets combine characteristics of fixed income and equity. Fixed-income attributes stem from the contractual obligation of tenants to make regular payments as specified in the lease contract between tenant and landlord. Properties encumbered by long-term lease obligations exhibit predominantly bond-like qualities. Equity attributes stem from the residual value associated with leases expected to be executed for currently vacant space or for anticipated future vacancies. Properties without tenants or with tenants on short leases exhibit predominantly equity-like qualities.
he's talking about owning properties directly, the way you might own a bond or a share of a company. In the long run, the returns of REITs are close to the returns of owning real estate, but in the short run they can be considerably different. The book goes on for pages on the structure and implications of different REITS.

I agree that REITs should not be used as a bond substitute. For one thing, they're usually leveraged, which magnifies both the gains and losses and makes them sensitive to interest rates.

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Re: reit allocation

Post by dsmil » Thu Sep 29, 2016 8:46 am

I have REIT's as 10% of my portfolio and consider it as part of my domestic stock allocation.

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Re: reit allocation

Post by Valuethinker » Thu Sep 29, 2016 9:02 am

dsmil wrote:I have REIT's as 10% of my portfolio and consider it as part of my domestic stock allocation.
As a simple rule of thumb, that works well ;-).

You won't be unpleasantly surprised by the volatility. It is large enough to make a meaningful difference to performance, but no so large a "bet" that you would come to regret it if it went wrong. You've added a degree of inflation protection to your portfolio.

The mental trap comes if one starts thinking it has bond-like stability. REITs don't.

(the underlying asset class, without leverage, should have more stable and predictable cash flows than stocks do. However unless you can invest in TIAA RE annuity, that's not available to individual investors in an acceptable low cost form with a degree of liquidity).

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Re: reit allocation

Post by pkcrafter » Thu Sep 29, 2016 9:06 am

Nisiprius is correct, REITS are stocks. I'm surprised that people are investing in REITS and don't know what they are.

The Oblivious Investor explains:
Should REITs Be Counted as Stocks or Bonds?

Despite their unique tax treatment and their high yield, shares of ownership in a REIT are still, by definition, equity investments. In other words, when considering your overall stock/bond allocation, a REIT fund should be counted as a stock fund because it is a stock fund — a sector-specific one, much like a health care fund, for example.
A REIT is a company that owns and typically operates income-producing real estate or related assets.


https://investor.gov/introduction-inves ... usts-reits

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Re: reit allocation

Post by soboggled » Thu Sep 29, 2016 9:13 am

Either/or thinking is often misleading. Considering REITs as stocks may be fine for AA computations, but in the real world it is also part of your "real estate allocation", like your house, which is why home owners should beware of REITs, a tilt to real estate no matter from what perspective you view it. If you own a lot of collectible art, should you buy a fund that invests in collectibles? If you own oil wells, should you buy energy funds?
And if domestic REITS are so necessary, why not international REITs, which are a much larger part of the world market?

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Re: reit allocation

Post by Atgard » Thu Sep 29, 2016 9:18 am

For what it's worth (not much), I consider REITs as a separate asset class, part of "real estate."*

I do understand the volatility is more stock-like than bond-like though, so when thinking about "60/40" or "80/20" portfolios from a risk tolerance perspective, I would count them on the stock side.

But I think they are uncorrelated enough with stocks, and behave differently enough from stocks (higher dividends, tax inefficiency, etc.) that I don't really count them as stocks, except if looking at a binary "risky/safe" ratio.

* For anyone who cares, I count my "buckets" as: (1) fixed income (cash, savings accounts, CDs, bonds), (2) stocks (incl. international), (3) real estate (home equity, REITs), and (4) commodities (gold, etc.). As a note, I do realize a primary home (not diversified, hard to liquidate, high "expense ratio") and REITs (the opposite) have significant differences; however, REITs served me well in generally tracking home prices going up before I was ready to buy a home, allowing my "home savings" to keep pace with the housing market until I bought, at which point I reduced my REIT holdings.

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Re: reit allocation

Post by Dulocracy » Thu Sep 29, 2016 10:14 am

I slice and dice. I like risk. I also like being realistic about things.

REITs are either stocks or a volatile 3rd class of investments that are similar to stocks in the risk profile.

We have a 10% allocation to real estate in our plan and treat it as a volatile 3rd asset class. Over time, our stocks will decrease and bonds increase, but real estate will stay the same. I like its diversifying aspects. (Sometimes when stocks zig, it zags... other times they both zig.) It has a low enough correlation to both stocks and bonds that we treat it as a third leg of the investing stool.
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Re: reit allocation

Post by Doc » Thu Sep 29, 2016 10:55 am

REITs are equities..........................
S&P DOW JONES INDICES AND MSCI ANNOUNCE AUGUST 2016 CREATION OF A REAL
ESTATE SECTOR IN THE GLOBAL INDUSTRY CLASSIFICATION STANDARD (GICS®)
STRUCTURE
https://www.msci.com/documents/10199/6a ... 394024e07f

Google "reits separate sector" for more.

Think about it.

Stockholders are part owners of an organization. As part owners they get a "share" of the profit of the company in terms of dividends or price increases. REIT holders are part owners of the organization.

Bonds are not owners of the organization they are lenders to that organization. As bonds holders (lenders) they get a share of the companies expenses in the form of interest payments.

REITS are now a separate sector of the equity market which reflect that they respond differently to market conditions than the other financial organizations in their old sector.

Take a look at how corporate bonds and treasury bonds responded to the Lehman crisis and compare it to Nisi's REIT chart upthread.

Bond Chart:

Image20mb image hosting

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Ask are Treasury bonds a different asset class then corporate bonds because they sometimes respond differently to market conditions?
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Re: reit allocation

Post by Dulocracy » Thu Sep 29, 2016 12:59 pm

REITs are equities in absolute definition, but that does not mean they cannot be considered a 3rd asset class in one's portfolio. There are significant differences. Instead of running a business providing a service or selling a good for a fee, REITs collect rents on existing property. You own an asset that is fixed. Instead of labor of individuals producing income, you are letting someone else use that location for the money. This is significant not because of the philosophical difference, but because REITs behave differently than equities and bonds.

I do agree, however, that if you are not going to consider it as a third asset class, you should consider it to be under the umbrella of equities.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: reit allocation

Post by Doc » Thu Sep 29, 2016 2:56 pm

Dulocracy wrote:There are significant differences. Instead of running a business providing a service or selling a good for a fee,
Take a look at the Global Industry Classification Standard.

https://en.wikipedia.org/wiki/Global_In ... n_Standard

There are some eleven categories. Do you really want to say that energy, consumer staples, IT, utilities and of course real estate are different asset classes because they are in different businesses and have different growth and stability characteristics? Is providing office space not a service? The industry apparently doesn't think so. Are Bogleheads smarter than the industry standards?

The reason to overweight REITs is not that they are different than the rest of the Total Investable Market but rather that most real estate investment is not traded on the stock exchange. As retail investors we are not able to easily access real estate investments in limited trading REITs or real estate partnerships. So we need to "overweight" available traded REITS in order to to obtain a Total Economic Market portfolio as oppose to a Total Stock Market portfolio.

Whether or not such a position is warranted is another question but calling REITS (or for that matter Utilities) bonds is short sighted.
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Re: reit allocation

Post by JaySayms » Thu Sep 29, 2016 3:28 pm

Dulocracy wrote:I slice and dice. I like risk. I also like being realistic about things.

REITs are either stocks or a volatile 3rd class of investments that are similar to stocks in the risk profile.

We have a 10% allocation to real estate in our plan and treat it as a volatile 3rd asset class. Over time, our stocks will decrease and bonds increase, but real estate will stay the same. I like its diversifying aspects. (Sometimes when stocks zig, it zags... other times they both zig.) It has a low enough correlation to both stocks and bonds that we treat it as a third leg of the investing stool.

For those that slice and dice, and particularly with REITS, I have heard that some of the premium is in the owners ability to "buy the dips", as REITS are potentially more volatile than other sectors of the market. Is this true? Do most people who own them, monitor their portfolios daily and buy the etf versions of these funds or is this a true "buy and hold" strategy with monthly contributions and infrequent rebalancing?

Also, when you say "10%", is that of your entire portfolio (including what you have in other funds such as total stock market) or do you simply have 10% or your portfolio in, say, VNQ?

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Re: reit allocation

Post by Stonebr » Thu Sep 29, 2016 3:35 pm

Equity. There's nothing fixed about the income from REITs.

I used to hold REITs and slice and dice. But then I found myself losing sleep over these picky little holdings in REITs, resources, whatever -- all the little 5% asset classes that were supposed to reduce risk and pump performance. After a few too many nights of worrying about the least important parts of my portfolio, I listened to Taylor and his message to keep things simple.

Good luck.
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Re: reit allocation

Post by nisiprius » Thu Sep 29, 2016 3:51 pm

telemark wrote:Swensen writes about complex ideas with precision and thus is worth studying carefully. When he writes
Real estate assets combine characteristics of fixed income and equity. Fixed-income attributes stem from the contractual obligation of tenants to make regular payments as specified in the lease contract between tenant and landlord. Properties encumbered by long-term lease obligations exhibit predominantly bond-like qualities. Equity attributes stem from the residual value associated with leases expected to be executed for currently vacant space or for anticipated future vacancies. Properties without tenants or with tenants on short leases exhibit predominantly equity-like qualities.
he's talking about owning properties directly, the way you might own a bond or a share of a company....
Yes. And the original poster, star9, talked specifically about "REITs," not about "real estate." The case for directly owned real estate being a separate asset class is stronger. For example, my holdings in the TIAA RE "account" (blue), compared with Vanguard REIT Index Fund (green on the chart despite being orange in the legend).

Source
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Re: reit allocation

Post by ValueInvestor99 » Thu Sep 29, 2016 5:29 pm

Are there any companies that are heavily invested in real estate, but are not REITs?

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Re: reit allocation

Post by nedsaid » Thu Sep 29, 2016 6:52 pm

Oh my gosh. What draws Nedsaid to a thread like a moth to a flame? What rings my bell?

Let's see: dividend threads, individual stock threads, reit threads, value threads, factor investing threads, investment advisor threads. Those seem to be my hot button topics. I just cannot resist.

I have owned REITs and Timber REITs for a long time. They have provided great diversification benefits for me particularly during the 2000-2002 bear market. Similar returns compared with stocks and usually a low correlation to stocks.

REITs have been bid up so much that their future expected returns are pretty much the rate of inflation, a lot of volatility with little in the way of future returns. Low interest rates are not a secret and the yield and dividend chasers have really pushed up the prices. I sold about 20% of my REITs but have no plans to exit the asset class.

My advice if you hold them is to keep what you have. If you have big gains, you might want to trim back a bit. If you don't own REITs now, I see no compelling reason to buy them now.
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Re: reit allocation

Post by Index Fan » Thu Sep 29, 2016 6:56 pm

I have 10% of my total asset allocation allotted to the VG REIT Index. I consider it part of my equity allocation.

It has worked out well for me for the last 16 years and has been a good diversifier. It is not a fund for the faint of heart, but the other 90% of my portfolio is TBM/TIPS/TSM/TISM which is quite staid.
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Re: reit allocation

Post by Dulocracy » Mon Oct 03, 2016 1:25 pm

Doc wrote:
Dulocracy wrote:There are significant differences. Instead of running a business providing a service or selling a good for a fee,
Take a look at the Global Industry Classification Standard.

https://en.wikipedia.org/wiki/Global_In ... n_Standard

There are some eleven categories. Do you really want to say that energy, consumer staples, IT, utilities and of course real estate are different asset classes because they are in different businesses and have different growth and stability characteristics? Is providing office space not a service? The industry apparently doesn't think so. Are Bogleheads smarter than the industry standards?

Absolutely not. I am not saying that those sectors are anything other than sectors. There are, however, some well respected bogleheads that put forward the proposition that REITs are fundamentally different. It is not that it is a different type of business, it is that the entire structure of the business is different, and it is based off of an underlying asset. When the commercial real estate market goes up and down, the value of the REIT is impacted. In other words: real estate markets have a direct impact on this asset class in a different way than any other asset class.

The reason to overweight REITs is not that they are different than the rest of the Total Investable Market but rather that most real estate investment is not traded on the stock exchange. As retail investors we are not able to easily access real estate investments in limited trading REITs or real estate partnerships. So we need to "overweight" available traded REITS in order to to obtain a Total Economic Market portfolio as oppose to a Total Stock Market portfolio.

I agree this is a perfectly valid reason to overweight REITs if one wishes to do so.

Whether or not such a position is warranted is another question but calling REITS (or for that matter Utilities) bonds is short sighted.

I agree. You should note that my statement was that some argue that REITs are a separate asset class and should be held apart, BUT that they are risky. While they zig while equities zag at times, it is still a risky asset class. If you consider it as a separate asset class, my point was that you should consider it as a part of the risk side. That would move an 80/20 portfolio to 70/10/20 (picking percentages out of the air for the example, not as a recommendation). I also state clearly that if you do not consider it as a separate asset, it should certainly remain on the equities side. My point is that however you look at it (whether you buy into the separate asset class or whether you do not), REITs are on the risk side of hte portfolio, not the bond side.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

Dulocracy
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Re: reit allocation

Post by Dulocracy » Mon Oct 03, 2016 1:39 pm

JaySayms wrote:
Dulocracy wrote:I slice and dice. I like risk. I also like being realistic about things.

REITs are either stocks or a volatile 3rd class of investments that are similar to stocks in the risk profile.

We have a 10% allocation to real estate in our plan and treat it as a volatile 3rd asset class. Over time, our stocks will decrease and bonds increase, but real estate will stay the same. I like its diversifying aspects. (Sometimes when stocks zig, it zags... other times they both zig.) It has a low enough correlation to both stocks and bonds that we treat it as a third leg of the investing stool.

For those that slice and dice, and particularly with REITS, I have heard that some of the premium is in the owners ability to "buy the dips", as REITS are potentially more volatile than other sectors of the market. Is this true? Do most people who own them, monitor their portfolios daily and buy the etf versions of these funds or is this a true "buy and hold" strategy with monthly contributions and infrequent rebalancing?

Also, when you say "10%", is that of your entire portfolio (including what you have in other funds such as total stock market) or do you simply have 10% or your portfolio in, say, VNQ?
Several issues come up here. First, I do not buy the dips. Some do. Some rebalance regularly. I rebalance on a curve using new money for the most part. (For example, my desired Mid cap is 10% mid value and 10% mid blend of my equity portion. I am currently contributing at 15% mid value and 5% mid blend to bring my allocation into focus). Some do make broad changes. There are arguments for and against. I try not to get into anything that might create tax complications if I can avoid it, which is a separate discussion.

As far as REITs, I treat them as a separate class. We have a target of 76/10/14 (we use my wife's age - 15 as of Jan 1 of a calendar year as our "age in bonds" formula. We use her age, as she is somewhat younger than am I, which is also a separate issue, but that gives a general explanation of our target.) By treating it as a separate asset class, we create a third leg to the rebalancing stool.

We do not hold REITs in taxable. We use retirement fund space for our REIT allocation. Please note that REITs do horribly in a taxable environment.

Full disclosure: I am right now a very bad boglehead. REITs are incredibly overpriced, so we have stopped contributions to them for now. When the valuations get back to normal (as they likely will when interest rates normalize eventually), we will contribute again. So many people are treating REITs as "bonds" that they are very overpriced.

Second full disclosure: For our bond portion, we have been using the reverse bond technique of finding a debt (student loan debt or mortgage debt) that costs more than bonds would provide and paying down said long term debt for the bond portion of our portfolio. Said strategy requires a recapture at the end, wherein we keep paying the mortgage after it is paid off, but we use that payment to purchase bond funds, recapturing what went outside of our portfolio.

As you can tell, I have lots of non-standard boglehead ideas, but I got all of them on this forum. At least some bogleheads think like this, although it certainly is not mainstream or accepted by many. Therefore, take what I say with a grain of salt.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

Engineer250
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Re: reit allocation

Post by Engineer250 » Mon Oct 03, 2016 4:42 pm

Dulocracy wrote:Full disclosure: I am right now a very bad boglehead. REITs are incredibly overpriced, so we have stopped contributions to them for now. When the valuations get back to normal (as they likely will when interest rates normalize eventually), we will contribute again. So many people are treating REITs as "bonds" that they are very overpriced.
I rolled over a pseudo-pension into a traditional IRA a couple months ago. So it wasn't really "invested" prior to it showing up in my IRA. I wanted something like 10% REIT. Had the same issues you did. I split my pension up amongst all my other investments immediately, and have been dollar cost averaging the portion meant for REIT in once a month since. I agree the advice is to always buy lump sum if you have the money, but given REITs screaming path up I have a hard time with that. It is painful enough with the one month buys each time. But hey, I have an asset allocation and I need to stick to it, right? My "plan" for how REIT became 10% of my portfolio didn't have anything to do with the current valuation of REIT.
Dulocracy wrote: Second full disclosure: For our bond portion, we have been using the reverse bond technique of finding a debt (student loan debt or mortgage debt) that costs more than bonds would provide and paying down said long term debt for the bond portion of our portfolio. Said strategy requires a recapture at the end, wherein we keep paying the mortgage after it is paid off, but we use that payment to purchase bond funds, recapturing what went outside of our portfolio.
I really like that and may use it once my cash flow frees up some more and I begin to start paying off my debt more seriously than minimums or ignoring my deferred debt. But then, I am especially supportive of paying off debt (in theory, obviously my budgeting skills are lacking that I am not practicing what I preach at the moment).
Dulocracy wrote: As you can tell, I have lots of non-standard boglehead ideas, but I got all of them on this forum. At least some bogleheads think like this, although it certainly is not mainstream or accepted by many. Therefore, take what I say with a grain of salt.
Same. I didn't know the idea of "buckets" was really frowned on here. Or many people invest most or all of their "emergency fund" which to me makes it not an emergency fund. But I suspect if you have a large taxable account, then it's not so risky to sell some to cash out when needed. But most early savers are not going to have (and maybe shouldn't if they aren't maxing tax-deferred) large amounts of money in after-tax accounts. I love reading and learning from these boards. But sometimes I have to remind myself the average income here is clearly above norm and I just can't replicate what a lot of people are able to accomplish.
Where the tides of fortune take us, no man can know.

Dulocracy
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Re: reit allocation

Post by Dulocracy » Tue Oct 04, 2016 9:05 am

Engineer250 wrote: But sometimes I have to remind myself the average income here is clearly above norm and I just can't replicate what a lot of people are able to accomplish.
A good attitude. I have a healthy salary, but well below the average salary on this site. This site is composed of two types of bogleheads: those whose answer to every threat is "3-fund" and those who are willing to look at other strategies, so long as they are using low cost funds. If this second category were not welcome on this site: 1) it would be a boring site repeating 3-fund over and over (although the 3-fund method is admittedly a very good one) and 2) you would not see reading on the wiki that included slice and dicers like Larry Swedroe and Rick Ferri.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

pascalwager
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Re: reit allocation

Post by pascalwager » Wed Oct 05, 2016 4:20 pm

nisiprius wrote:
pascalwager wrote:
star9 wrote:Do you figure a REIT into your stock allocation or your bond allocation? I've seen it done both ways in investment books. Or should a REIT be allocated as a separate entity in a portfolio? Not a stock and not a bond but a separate fund.
It seems to me that a REIT is a stock so should be part of your portfolio's stock allocation.
Opinions sought. Would also be interesting to hear what allocation people give to REITS (if at all) and why.
David Swensen considers REIT a hybrid, part stock and part bond.
1) David Swensen may "consider" them to be anything he likes, but they are stocks.

2) Strong words, but: it's crazy to consider them bonds. During 2008-2009, I was personally holding all three: stocks (Vanguard Total Stock Index Fund, VTSMX, orange), bonds (Vanguard Total Bond Index Fund, VBMFX, green), and REITS (Vanguard REIT index fund, VGSIX, blue) and it was very memorable.

Source
Image

Anyone who can look at this chart and say that the blue line is the same kind of thing as the green line is... crazy.

And even admitting that 2008-2009 were special, in my opinion anyone who can look at it and say "the blue line is a hybrid that is somewhere in between the orange line and the green line" is... um... hey, exactly when did David Swensen say so?

3) The word "bond" has a confusingly broad range of meanings, but when we say bond often we are talking about investment-grade bonds. An investment-grade bond has two characteristics:
a) A guaranteed
b) income stream.

People are way, way, way too eager to tout something that isn't a bond as being "like" a bond simply because it has the "income stream" characteristic without the "guaranteed" characteristic.

Anyone who purchases a REIT in any form is a participant in the upside and downside risks of a business. You can say that a REIT is an unusual kind of business, and that REITS are more different from other sectors than other sectors are from each other, but it's still a business and you're have an equity in it.

4) When I held shares of the TIAA Real Estate "account," which made direct investments in real estate and showed you the names and addresses of all the buildings it owned in the quarterly reports--in the early years it actually showed you pictures, which was cool--I created a category of its own, called "real estate." That was probably sensible. When I consolidated to Vanguard, sold the TIAA RE, and bought VGSIX with the foolish idea that it was similar, I still classified it as "real estate." That was probably wrong. In any case, having classified it as "real estate" I never really knew what to do with it other than stare at the pie chart, and fortunately the pie slice was small enough that I didn't think I needed to think about it.

5) At the time, Burton Malkiel was strongly recommending "real estate" in A Random Walk Down Wall Street and his words were something like "it has similar risk and return to stocks, but a low correlation with them." So according to the conventional wisdom, REITS are indeed like stocks but are good diversifiers in the MPT, efficient frontier, slice-and-dice sense.

6) I never had a big percentage in REITS, and even though it was tiny, watching it during 2008-2009 was exquisitely painful. I didn't bail, but as soon as my calculations showed that I was back to even in my VGSIX account, I exchanged VGSIX for Total Stock and never looked back. OK, I've looked back. I don't want to defend this as having been the right thing to do, I'm just reporting what I personally actually did.

7) You have to look at 2008-2009. It happened. You can say "nisiprius is influenced by recency, fighting the last war, is a fraidycat," etc. etc. Yep. You can say "it cannot possibly happen again." Nope. You can say "So, let's say 10% REITS, as in the Bill Schultheis Coffeehouse Portfolio. Even if something like 2008-2009 happens again, I can tolerate that in 10% of my portfolio." Maybe.
Swensen's Unconventional Success was published in 2005. He was influenced by the nature of the basic revenue stream from tenent to landlord, but I agree that the performance curves are much more stock-like than bond-like. It would be interesting to hear his current understanding of REITs, but he didn't actually call them bonds. He also stated that they could be expected to provide an inflation hedge with a lower opportunity cost than other alternatives.
Preferred AA: Total US and foreign stock markets and short-term Treasury fixed income

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