Justification for Adding REITs

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Call_Me_Op
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Justification for Adding REITs

Post by Call_Me_Op »

Given that REITs are a subset of the total stock market, what is the justification for tilting toward REITs (that is, adding more REITs) as opposed to some other major market sector, such as energy or consumer staples?
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Re: Justification for Adding REITs

Post by Vanguard Fan 1367 »

I believe that Malkiel thinks that REITS might be considered as sort of a "bond" in this era of low interest rates. Maybe because they have to pay out a pretty high percentage of their earnings in dividends. I bought some and am sort of wanting to get rid of them but the wife likes the diversity.

They have performed ok for me. And you can look at the returns of the Vanguard REIT which is what I have and they are just fine.
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Re: Justification for Adding REITs

Post by livesoft »

I think the justification is that REITs are less correlated to TSM than some other things, so that REITs can be up or down whether they are found in TSM or not. That means, one can rebalance into them when they are low and rebalance out of them when they are high. Either way, one can make some money. So if you are just going to buy a REIT fund and let it sit, then there is no justification for owning a REIT fund [separately].
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Re: Justification for Adding REITs

Post by mhalley »

Some consider REITS to be a further diversifier for equities. This can be both higher or lower (according to the Wiki). So if you have a very long time horizon, you could benefit from those times when the correlation is negative. From an article on the Portoflio Solutions website:
"There are two primary roles REITs can play in a long-term investor’s portfolio. One is the role of a diversifier. REITs have shown a correlation to U.S. common stocks that has varied over time from high to low. Investors with long time horizons, such as those funding retirement, can benefit from their periods of low correlation."
"In an analysis from NAREIT, large-cap stock and REIT total returns were only 56% correlated over a 20-year period from 1994 through 2013. In comparison, large-cap and small-cap stocks during the same period were 81% correlated. The diversification of REITs can also provide additional long-term returns without an increase to risk, according to the Washington, D.C.-based association. Over the same time period studied above, a 60% stock and 40% bond portfolio that allocated 10% to REITs would have a 0.2% higher annual return per year on average than one without REITs while risk stayed about the same."
That 0.2 % doesn't seem like much, does it? I guess that is why the 3 fund portfolio exists. :wink:
I addition they are a source of income for those already retired.
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Re: Justification for Adding REITs

Post by livesoft »

@mhalley, that's all well and good, but one gets REITs in a TSM fund and thus gets all the stuff you quoted anyways. :)
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Re: Justification for Adding REITs

Post by knpstr »

I would assume it would be the same justification for anyone tilting towards anything.
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Re: Justification for Adding REITs

Post by Doc »

It is not a tilt.

Most REITS are not traded on a stock exchange. So if you want to have a TRUE Total Market and not just a Total "Stock" market you have to add REITS.

REITS are equities which unlike bonds, have no "par" value so they are considered equities despite the fact that the income is not considered as qualified dividends but ordinary income just like bond interest. But that's a secondary issue.
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Re: Justification for Adding REITs

Post by anil686 »

Rick Ferri wrote in All About Asset Allocation 2nd edition that most real estate is privately held - not publicly held by corporations. Thus real estate makes up a disproportionate share of the economy than what it is represented in TSM. I think (and it has been a few years since I read it) that it represents about 3% of TSM but 13% of the economy and the four fund portfolio was designed to increase real estate to it's economic weight. Just what I remember from the book and of course debatable as to whether to add or not over it's weight in TSM. I buy the idea in All About Asset Allocation and so I hold REITs in my 401K - hope it helps...
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Re: Justification for Adding REITs

Post by bertilak »

Beyond what's said above, Some would say that real estate is under represented in the Stock market because so much real estate investment is not traded on the stock market.

Tilting to REITs is seen as a way to correct this imbalance.

I'm not suggesting that's gospel, it's just a justification I have heard about. Personally I am not convinced. Once you go for REITs, what's next? Works of art are not traded on the stock market but does that mean we should all chip in and buy fine art at auctions? Navajo Indian rugs? Bitcoins?
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Re: Justification for Adding REITs

Post by Portfolio7 »

anil686 wrote:Rick Ferri wrote in All About Asset Allocation 2nd edition that most real estate is privately held - not publicly held by corporations. Thus real estate makes up a disproportionate share of the economy than what it is represented in TSM. I think (and it has been a few years since I read it) that it represents about 3% of TSM but 13% of the economy and the four fund portfolio was designed to increase real estate to it's economic weight. Just what I remember from the book and of course debatable as to whether to add or not over it's weight in TSM. I buy the idea in All About Asset Allocation and so I hold REITs in my 401K - hope it helps...
I've read that data before, and it's interesting in context - in the backtests I've run, a 10% slug of REITs (as a % of equities, +/- a few %) seems to provide optimal risk/reward benefits. Too much swamps the portfolio, too little has no effect. That's assuming one has a healthy allocation to US large caps somewhere in their portfolio. If you slice and dice.
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Re: Justification for Adding REITs

Post by alex_686 »

Add me to the overweight of REITs, specificilly because of the diversification that they add. As a asset class they have a persistent low correlation with the S&P that is not replicated by other sectors.
livesoft wrote:@mhalley, that's all well and good, but one gets REITs in a TSM fund and thus gets all the stuff you quoted anyways. :)
I will respectfully disagree. I have always considered REITs to the platypus of the stock market. Technically it is a stock but it does not behave like the rest of them. There are enough weird tax rules around REITs that keep their sector classification pure and the businesses models different than other asset classes. Should one hold stocks and bonds at their market neutral weight? Nope. One creates a mean variance portfolio to get the best risk / return asset allocation. Same with REITs.
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Re: Justification for Adding REITs

Post by nisiprius »

1) Same as with other kinds of tilts. Small value is just a subset of the total market, but there is a sophisticated argument to be made that it is better to have a small-cap value tilt, and there might be something to it.

2) It is a fact that REITs have special rules that make them structurally different from other stocks. A REIT must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Thus, REITs are, among other things, a high-dividend category. A random web page I Googled--from NAREIT, which is the mouthpiece of the REIT industry--for February, 2017, the average yield of all Equity REITs was 3.83%, compared to 2.02% for the S&P. This certainly doesn't prove that a REIT tilt is good, but it does suggests that REITs are a well-defined special category--more well-defined and more special than small-cap value, for example.

3) The idea that REITs behave differently from the stock market in general is also confirmed by looking at correlations. According to this website, over the period 05/21/1998 - 03/21/2017, correlation of the stock market as a whole (using VTSMX as a proxy) with small-cap value (VISVX) was 0.91. That is, small-cap value was not a strong diversifier for the market as a whole. By comparison, REITS (VGSIX) had only an 0.68 correlation.

I don't find any of this particularly convincing. But, just as I said about small-cap value, there might be something to it, and there are fairly rational reason for regarding them as a category of its own with special characteristics.

I don't have a REIT tilt myself. I had a small holding of VGSIX and committed a few behavioral errors in 2008-2009 when it lost 72% of its value. I quit adding to it, and as soon as I was back to even I sold it. I decided that whatever can be said about them, they aren't for me.
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Re: Justification for Adding REITs

Post by Pajamas »

A good reason to add REITs would be instead of acting as a landlord.

I am continuously amazed at how many people post here and elsewhere on the internet about wanting to buy a house or two or three to rent out or even consider becoming a landlord a viable alternative to selling the house they live in when they move to another one, sometimes to one that is in another city. Sometimes people ask whether or not they should sell a house they used to live in but have been renting out at a loss every month, sometimes even with a net loss after figuring appreciation or depreciation.

Every time I read one of those posts, I think what a nightmare dabbling in real estate as a landlord can be and how much easier and better it would be for them to invest in REITs as opposed to physical real estate directly.
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Re: Justification for Adding REITs

Post by wolf359 »

I found this article at Paul Merriman's site to be valuable: http://paulmerriman.com/10-things-need-know-reits/

I have a 10% tilt to REITs for diversification and to reduce volatility. I just like the way my portfolio behaves with them there.

With interest rates going up, people who were buying REITs for yield may leave for bonds. REITs were also expected to do worse if their borrowing costs go up.

On the other hand, REITs are generally commercial in nature, with long-term leases and borrowing costs. They're not necessarily immediately impacted by changes in the interest rates (my opinion), and can pass costs on to customers in the long run (also my opinion.) Equity REITs have recently been added as a separate category to the S&P 500 index. This increased visibility may raise their prices over time.

When they act as a diversifier, that means that they will be dropping when everything else is going up. At that time, they will look like a loser. REITs are a commitment. You have to focus on total return and the long term. (This also means they may go up when everything else is going down, but people don't generally sell assets for doing well.)

If you buy into REITs, only buy a diversified index with low costs. If you're unsure, you will do just fine sticking with Total Stock Market (which has REITs in it.)

I have one rental property, but my REITs keep me from getting more. Real estate you directly invest in is very different from a REIT. REITs tend to be commercial properties, are professionally managed, are truly passive, and are geographically diversified. They are also best held in a tax sheltered account.
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Re: Justification for Adding REITs

Post by Call_Me_Op »

anil686 wrote:Rick Ferri wrote in All About Asset Allocation 2nd edition that most real estate is privately held - not publicly held by corporations. Thus real estate makes up a disproportionate share of the economy than what it is represented in TSM. I think (and it has been a few years since I read it) that it represents about 3% of TSM but 13% of the economy and the four fund portfolio was designed to increase real estate to it's economic weight. Just what I remember from the book and of course debatable as to whether to add or not over it's weight in TSM. I buy the idea in All About Asset Allocation and so I hold REITs in my 401K - hope it helps...
Funny, I was just reading this in Rick's book this morning. I guess if you make the case that one should invest in an asset class in proportion to its weight in the economy, that could be a justification for adding more REITs.

I also agree with some others that there could be diversification benefits, although I imagine the same can be said for other major stock market sectors.

My thanks to all who have responded. Lots of good points.
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Re: Justification for Adding REITs

Post by Doc »

Call_Me_Op wrote: I also agree with some others that there could be diversification benefits, although I imagine the same can be said for other major stock market sectors.
REITS have a unique tax structure that makes them somewhat more unique than other equity sectors. The cause of the non-qualified dividends is probably the major difference.
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Re: Justification for Adding REITs

Post by nisiprius »

Call_Me_Op wrote:...I guess if you make the case that one should invest in an asset class in proportion to its weight in the economy, that could be a justification for adding more REITs...
Yes, but what drives me bananas is so very often people will suggest you should invest according to the weight in the economy without even trying to make that case. They will just talk about the economic balance, as if the case had already been made and as if there were a firm consensus on it.

That is, they will say something like "Many investors' portfolios have less than 6% in small-cap stocks. Did you realize that small businesses are vibrant, powerful, dynamic engines of wealth creation that produce 46.713% of private-sector output? Because most of them do not issue stocks, you are missing out on participation in their lucrative returns. Don't you think you should beef up your holdings of the stocks of small companies that do issue stocks in order to make up for the woeful underrepresentation of small businesses in your portfolio?" Well, no, I don't. In fact I seriously doubt that there's much correlation between CyberClass M-Learning, which just issued its IPO, and the chain of twenty Auto-Kleen carwashes (serving Greater Zenith since 1978).

It's just an idealized theory based on a boatload of assumptions, but the basis of indexing has to do with the properties of investors trading assets within a market. There are special characteristics of "the market portfolio," the total set of assets such as the $25 trillion worth of stocks in the U.S. market. One is that when you have a pure speculative trade--when investor X sells stock A and then uses the proceeds to buy stock B from investor Y--the total number of dollars in the market shouldn't change. The market value of A goes down, the market value of B goes up. Therefore, an index investor, mirroring the market, is effectively on both sides of the trade and sees no change in the value of their index fund. Any investor who is overweighted in A sees their portfolio go down, any investor overweighted in B see theirs go up. The investors who don't mirror the market are implicitly taking sides and are affected by the behavior of speculators. Investors who "own the market" are not; they get the benefit of new money flowing into the market reflecting the value created by the businesses behind the stocks.

As, say, mass affluent retirement savers, what we invest in is, primarily, securities and mutual funds that hold securities. There isn't any good, safe way to invest directly in other things. (TIAA Real Estate is a interesting exception. In the early days their quarterly report actually included photographs of the apartment houses and such that TIAA had bought for me). The connection between "economic activity X" and "stocks of companies in the X business" is extremely loose and extremely vague. Certainly, the price of gold is relevant to the business of gold mining companies, but they aren't at all equivalent. It's proverbial that the stocks of companies in fastest-growing national economies are not the fastest-growing stocks. And so forth.
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Re: Justification for Adding REITs

Post by harvestbook »

wolf359 wrote:I found this article at Paul Merriman's site to be valuable: http://paulmerriman.com/10-things-need-know-reits/
I'm a Merriman Boglehead and he makes great cases based on historic 10-year periods and longer. As he says, best for a tax-deferred account. I'd never dream of taking on the hassles of being a landlord--too many friends have failed miserably doing it small time. I'm currently 5.8 percent US REIT and 2.6 percent International REIT slowly moving toward 5 and 5 as I adjust my IRA each year. Works for me. On the other hand, doesn't bother me if nobody wants to own them.
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Re: Justification for Adding REITs

Post by simplesimon »

I allocated 10% of equities to REIT in 2009 after reading Larry Swedroe's Alternative Investments book and have maintained/rebalanced to that allocation ever since. I haven't tracked its performance and I honestly don't know if I would have been better off sticking to TSM.
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Re: Justification for Adding REITs

Post by Doc »

harvestbook wrote:I'm currently 5.8 percent US REIT and 2.6 percent International REIT slowly moving toward 5 and 5 as I adjust my IRA each year.
Check out the International REIT structure. I have a vague recollection that they do not have same attributes as US.
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Re: Justification for Adding REITs

Post by wolf359 »

simplesimon wrote:I allocated 10% of equities to REIT in 2009 after reading Larry Swedroe's Alternative Investments book and have maintained/rebalanced to that allocation ever since. I haven't tracked its performance and I honestly don't know if I would have been better off sticking to TSM.
Run your actual portfolio holdings through portfolio visualizer (http://www.portfoliovisualizer.com).

Try with and without REITs. It's safe to look. During that timeframe, REITs did pretty well (starting from the bottom of the real estate bubble burst and people fleeing to REITs in search of yield.)
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Re: Justification for Adding REITs

Post by KyleAAA »

The best justification I've heard is that the allocation of REITs in the total stock market isn't indicative of the size of the commercial real estate market. So one should tilt to REITs as a proxy for commercial real estate, the vast majority of which is private. In other words, real estate isn't adequately represented in the index based on its contribution to the economy. This is fundamentally different than the "small business" case made above because commercial real estate is a large, liquid market in a way that the small business sector is not. You can't easily buy a portfolio of 50 mom and pop diners but you can easily buy a portfolio of 50 apartment or office buildings, either directly or through a REIT: it's not a perfect proxy, perhaps not even a very good proxy, but I deem it better than no proxy. I prefer to own 50 apartment buildings in a REIT because I'm lazy. If there were an easy, transparent way to proxy the contribution of small businesses to the economy through some sort of private equity fund I would advocate doing so. But I can't, so I tilt heavily to small-value. It isn't the same but it's the closest proxy I can practically invest in.
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Re: Justification for Adding REITs

Post by abuss368 »

REITs are real estate. The Vanguard International REIT fund has worked well for us when combined with the U.S. REIT fund.
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Re: Justification for Adding REITs

Post by NiceUnparticularMan »

The goal of the at-risk allocation in my long-term portfolio is to accumulate ownership shares of economically-productive assets, aka the means of production. Real estate is an important category of such assets, so I want to buy a significant amount of real estate. I want to do that in a diverse, efficient, and cheaply-leveraged way, and REITs accomplish that. I don't think it is important to determine with precision what that allocation "should" be, but based on wanting it to be meaningful and having a rough understanding of the relative role of real estate in economic production, something like 10% of my at-risk portfolio seems reasonable.

I wish REITs were never commingled with ordinary company stocks in my company stock indexes, because I see them as different things. But I have stopped worrying about that and I accept some REITs are included in some of my company stock indexes, and I have adjusted down my target REIT allocation to (very roughly) account for this issue.
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Re: Justification for Adding REITs

Post by Index Fan »

I've held a 10% position in the VG REIT Index for 16 years now and it has been a good diversifier and is one of my highest-returning funds during that time period. It's a wild ride at times, but this is my 10% position in 'tilting'. The rest of my portfolio is basically TSM / TISM / TBM / TIPS.
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Re: Justification for Adding REITs

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Of all the things not well-represented with a global all-cap portfolio, REITs would be dead last on my list to add a side-position in because of my already substantial long-term position in real estate via my home. It's BH mantra to pretend ones home isn't an investment or a real estate position but my money-pit has tracked the Shiller index and performed splendidly for our major metro area quite well since 1991 (+5X versus the index +4X). Vanguard REIT VGSLX was down 67% March 2007 through February 2009 versus -15% for the money pit - so much for diversification benefit.

The fancy portfolio analyzer I use thinks my equity portfolio is actually 5% alternatives in both domestic and international, most of that REITs. That and the money pit seems like plenty of RE.
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Re: Justification for Adding REITs

Post by avalpert »

MnD wrote:Of all the things not well-represented with a global all-cap portfolio, REITs would be dead last on my list to add a side-position in because of my already substantial long-term position in real estate via my home. It's BH mantra to pretend ones home isn't an investment or a real estate position but my money-pit has tracked the Shiller index and performed splendidly for our major metro area quite well since 1991 (+5X versus the index +4X). Vanguard REIT VGSLX was down 67% March 2007 through February 2009 versus -15% for the money pit - so much for diversification benefit.

The fancy portfolio analyzer I use thinks my equity portfolio is actually 5% alternatives in both domestic and international, most of that REITs. That and the money pit seems like plenty of RE.
Prefacing by saying I don't own a separate REIT allocation (I do own the TIAA Real Estate fund and if I didn't have access to that would consider other direct ownership funds but not REITs) and I don't see it as a true substitute for an allocation to direct real estate ownership (and a particularly poor way to get exposure to the non-publicly traded REIT world making that 'justification' laughingly wrong).

That said, I agree that homeowners have a large, undiverisfied exposure to the asset class - would that be an argument, in low interest rate environments, for taking debt on the house (which most people do anyway) to invest specifically in diversified real estate positions? I hadn't thought about that way before but your post triggered the idea.
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Re: Justification for Adding REITs

Post by Doc »

avalpert wrote:poor way to get exposure to the non-publicly traded REIT
I think there is a misconception here. It is not that REITS are not publically traded it is just that many of them are not listed on a major stock exchange and therefore don't get into an Equity Index.
Most REITs are traded on major stock exchanges, but there are also public non-listed and private REITs.
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Re: Justification for Adding REITs

Post by nick evets »

Doc wrote: I think there is a misconception here. It is not that REITS are not publically traded it is just that many of them are not listed on a major stock exchange and therefore don't get into an Equity Index.
In the context of this discussion, would you consider public, non-traded REITs to be...REITs?
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Re: Justification for Adding REITs

Post by alex_686 »

MnD wrote:Of all the things not well-represented with a global all-cap portfolio, REITs would be dead last on my list to add a side-position in because of my already substantial long-term position in real estate via my home. It's BH mantra to pretend ones home isn't an investment or a real estate position but my money-pit has tracked the Shiller index and performed splendidly for our major metro area quite well since 1991 (+5X versus the index +4X). Vanguard REIT VGSLX was down 67% March 2007 through February 2009 versus -15% for the money pit - so much for diversification benefit.
2 points.

First, a home has a high amount of specific risk which reduces its diversification value. Then REITs are more about housing, it also has commercial property, which increases REITs diversification effect.

Second, I am with you about including your house in your AA. If you want to do things correctly, you will want to included your house, treat your mortgage as a negative bond, and treat S.S. and pensions as bonk like assets. In my experience, once you have done all of that work, the optimal mean variance portfolio still has a slight over-allocation to REITs.
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Re: Justification for Adding REITs

Post by abuss368 »

Index Fan wrote:I've held a 10% position in the VG REIT Index for 16 years now and it has been a good diversifier and is one of my highest-returning funds during that time period. It's a wild ride at times, but this is my 10% position in 'tilting'. The rest of my portfolio is basically TSM / TISM / TBM / TIPS.
You have an excellent investment portfolio. Very close to the recommendation of David Swensen.

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Re: Justification for Adding REITs

Post by abuss368 »

alex_686 wrote:
MnD wrote:Of all the things not well-represented with a global all-cap portfolio, REITs would be dead last on my list to add a side-position in because of my already substantial long-term position in real estate via my home. It's BH mantra to pretend ones home isn't an investment or a real estate position but my money-pit has tracked the Shiller index and performed splendidly for our major metro area quite well since 1991 (+5X versus the index +4X). Vanguard REIT VGSLX was down 67% March 2007 through February 2009 versus -15% for the money pit - so much for diversification benefit.
2 points.

First, a home has a high amount of specific risk which reduces its diversification value. Then REITs are more about housing, it also has commercial property, which increases REITs diversification effect.

Second, I am with you about including your house in your AA. If you want to do things correctly, you will want to included your house, treat your mortgage as a negative bond, and treat S.S. and pensions as bonk like assets. In my experience, once you have done all of that work, the optimal mean variance portfolio still has a slight over-allocation to REITs.
How does one rebalance a home?
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Re: Justification for Adding REITs

Post by MnD »

abuss368 wrote:
alex_686 wrote:
MnD wrote:Of all the things not well-represented with a global all-cap portfolio, REITs would be dead last on my list to add a side-position in because of my already substantial long-term position in real estate via my home. It's BH mantra to pretend ones home isn't an investment or a real estate position but my money-pit has tracked the Shiller index and performed splendidly for our major metro area quite well since 1991 (+5X versus the index +4X). Vanguard REIT VGSLX was down 67% March 2007 through February 2009 versus -15% for the money pit - so much for diversification benefit.
2 points.

First, a home has a high amount of specific risk which reduces its diversification value. Then REITs are more about housing, it also has commercial property, which increases REITs diversification effect.

Second, I am with you about including your house in your AA. If you want to do things correctly, you will want to included your house, treat your mortgage as a negative bond, and treat S.S. and pensions as bonk like assets. In my experience, once you have done all of that work, the optimal mean variance portfolio still has a slight over-allocation to REITs.
How does one rebalance a home?
Is this the tired old canard that something isn't an investment in general or a real estate position in particular if it can't be rebalanced?
How do you rebalance a small apartment building purchased as an investment?

A home isn't a clone of a Vanguard REIT fund but the awesome liquidity and diversification of the latter didn't help much when is dropped by over 67% in 2 years. REITs are in broad domestic and international index funds and most serious investors own a home. Some own 2nd homes and/or other residential or commercial real estate. I guess I don't see some great shortfall of real estate exposure for Bogleheads that calls for adding that sector explicitly above and beyond the index weightings.
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Re: Justification for Adding REITs

Post by Doc »

nick evets wrote:
Doc wrote: I think there is a misconception here. It is not that REITS are not publically traded it is just that many of them are not listed on a major stock exchange and therefore don't get into an Equity Index.
In the context of this discussion, would you consider public, non-traded REITs to be...REITs?
Yes.

I think I was not clear. There are public REITS that are not traded on an exchange. There are also other types of "trusts" for REITS like limited partnerships. Therefore these do not get included in the market indexes that we typically use as for our guides. So the argument is that if you want an "economic" weighting for REITS you have to increase your weighting over what is included in TSM. Since retail investors do not typically invest in other types of financial structures we have to add exchange traded REITS to our TSM portfolio.

I personally do not have a dog in this fight. While in the accumulation phase I had a REITS position that was some +10% over what was in the total stock market index. My IPS said I should eliminate the position by dollar cost averaging out when I entered the withdrawal phase. Which I did. I now hold 4.6% REITS which are included in other funds while Vg TSM fund is 3.7% I don't consider this to be overweight just what happens given the funds than are in our portfolio none of which are specifically REITS
Private REITs issue shares that are neither traded on national exchanges nor registered with the SEC, but rather issued pursuant to one or more of several exemptions to the securities laws set forth in regulations promulgated and enforced by the SEC. These exemptions include rules set forth under Regulation D, permitting an issuer to sell securities to "accredited investors," and Rule 144A, which exempts securities issued to qualified institutional buyers (QIBs).
https://www.reit.com/investing/reit-bas ... vate-reits
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Re: Justification for Adding REITs

Post by bertilak »

abuss368 wrote:How does one rebalance a home?
The goal is not to rebalance a home but to rebalance an asset class, in this case real estate. If one has both a home and a REIT (or REIT fund) one can do one's rebalancing at the margin, using the REIT(s).

That said, the value of a home might swamp the overall percentage one wants to hold in real estate, unless you have a very large portfolio a compared to the value of your home. I personally don't consider it in my AA because I need to provide a place to live one way or another.
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Re: Justification for Adding REITs

Post by harvestbook »

Over a long time horizon, a house is a pile of ruins. I don't know why anyone would consider it an asset rather than a liability, but that's just me. Best-case scenario, it's a low-cost place to live while you build wealth.
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Re: Justification for Adding REITs

Post by InvestorNewb »

I've held REITs since 2013. Keep reinvesting the dividends and you can get rich that way.

I'm sharing with you how much I made from my REIT dividends alone:

2013: 2,889.37
2014: 3,574.62
2015: 4,331.91
2016: 5,769.42
2017: ?

That's 4 years of reinvesting dividends. Imagine what they will look like in another 20 years.

... as you can see, the growth is impressive. Just make sure they are in a tax-sheltered account.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Justification for Adding REITs

Post by avalpert »

InvestorNewb wrote:I've held REITs since 2013. Keep reinvesting the dividends and you can get rich that way.

I'm sharing with you how much I made from my REIT dividends alone:

2013: 2,889.37
2014: 3,574.62
2015: 4,331.91
2016: 5,769.42
2017: ?

That's 4 years of reinvesting dividends. Imagine what they will look like in another 20 years.

... as you can see, the growth is impressive. Just make sure they are in a tax-sheltered account.
Or you could underperform the market... as Vanguard's REIT index has it's total market fund since January 1st 2013...

You aren't going to get rich simply reinvesting dividends into a REIT, sorry but people shouldn't have the wrong expectations.
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Re: Justification for Adding REITs

Post by abuss368 »

InvestorNewb wrote:I've held REITs since 2013. Keep reinvesting the dividends and you can get rich that way.

I'm sharing with you how much I made from my REIT dividends alone:

2013: 2,889.37
2014: 3,574.62
2015: 4,331.91
2016: 5,769.42
2017: ?

That's 4 years of reinvesting dividends. Imagine what they will look like in another 20 years.

... as you can see, the growth is impressive. Just make sure they are in a tax-sheltered account.
Do you hold a large overweight to the Vanguard REIT fund? I have REITs in all our accounts and it has worked well.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Justification for Adding REITs

Post by ztn »

What is the correlation of REITs with 10 year Treasuries? With Intermediate corporate bonds? Long-term corporate bonds? I expect these correlation are more relevant than just looking at an overall equity market correlation since REITs, IN THE SHORT RUN, move more directly with longer rates. And with higher vol than equities AND low levels of interest rates overall (resulting in higher expected int rate vol plus higher equity vol), it seems to me like a very strange sub-sector to focus on.
On the other hand, IN THE LONG RUN, REITs should be fine. But if equities are also fine in the long run, why bother with REITs at all given the supercharged interest rate AND equity vol?
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Re: Justification for Adding REITs

Post by MnD »

harvestbook wrote:Over a long time horizon, a house is a pile of ruins. I don't know why anyone would consider it an asset rather than a liability, but that's just me. Best-case scenario, it's a low-cost place to live while you build wealth.
Homeowners, renters and REIT investors are all paying the many costs of real estate maintenance, improvements and depreciation.
The liability (as you put it) I purchased in 1991 can be sold for 5X what I paid for it. It has had many expenses like any other real estate investment. Those who market/manage REITs and rent dwellings are not acting out of charity for the benefit of retail investors and renters.
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Re: Justification for Adding REITs

Post by NiceUnparticularMan »

I prefer to put our house on the consumption side rather than the investment side. If I am wrong, then I will just be pleasantly "surprised".
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Re: Justification for Adding REITs

Post by PFInterest »

Justification? Because I want to.
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Re: Justification for Adding REITs

Post by InvestorNewb »

avalpert wrote:Or you could underperform the market... as Vanguard's REIT index has it's total market fund since January 1st 2013...

You aren't going to get rich simply reinvesting dividends into a REIT, sorry but people shouldn't have the wrong expectations.
I disagree about the rich part if you hold them for a long time horizon. As an example I won't be selling any of my REIT shares for another 35 years...only reinvesting the dividends that I receive. I'll let you do the math on that. :happy
abuss368 wrote:Do you hold a large overweight to the Vanguard REIT fund? I have REITs in all our accounts and it has worked well.
I have about 15% of my portfolio in Vanguard's REIT ETF (VNQ).
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Justification for Adding REITs

Post by Valuethinker »

Call_Me_Op wrote:Given that REITs are a subset of the total stock market, what is the justification for tilting toward REITs (that is, adding more REITs) as opposed to some other major market sector, such as energy or consumer staples?

Reasons for

- the underlying assets, and the structure of REITs, means they are not really like other stocks (MLPs sort of, ish)
- empirically they have lower correlation with US equity market than most other sectors (about 0.68)
- Swensen recommends them on this basis (maybe Wm Bernstein to)
- correlation of returns of underlying assets with inflation should be higher than most other asset classes except TIPS, ibonds-- higher than stocks or straight bonds

Reasons against

- they use up tax advantaged space, treatment of dividends in US mandates that
- people confuse them as bond proxies, that's not true - they are much riskier than that
- volatility has been higher than Total US Stock Market, and particularly in the 2008-09 period when they lost c. 78% of their value, so there's a question whether investors will really "stay the course" and whether the diversification benefits are still present
- like most high yielding stocks, they have been driven up by "chasing yield" investors. Yields are thus at more or less historic lows. If the US is now on a steadily rising trend of interest rates, one would expect interest sensitive stocks to underperform (utilities, REITs etc)
- valuations are at the outward edge of expensive by historic norms
- Commercial RE market in the US is flashing some warning signals. On the order of 3,000 stores are going to close in the next 2 months, according to Bloomberg, and the viability of a number of shopping malls will thus be called into question (read, they are DOA). Similarly office prices have been driven up by investors hunting yield, but demand has not kept pace-- Kushner, for example, is struggling to let his building in NYC. There may, again, be excessive financial engineering at work in commercial US RE

To me the one that shows up the greatest red flag is that correlations moved much closer to the US market as a whole during the Crash--these in effect became quasi-financial stocks. So the diversification benefit was reduced just when you needed it most. Top to bottom it was a vertiginous ride and had I held a meaningful overweight (and I was a US investor) I doubt I would have rebalanced in (although I might not have panicked out).

The other flag, hotly debated here, see thread a year or two ago started by wbern (old posting name for William Bernstein), which led me to write a piece (incorporated somewhat into the wiki) about how to value Commercial RE and REITs, was valuation. Given the current yield, you cannot expect big returns going forward from these things. I gather from his posts Larry Swedroe agrees, and suggests international REITs instead (note that a lot of International RE funds are largely stocks, rather than REITs, because REIT is not a common structure in other markets). But that's a non Boglehead argument about valuation, so take it with that caveat in mind.
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Re: Justification for Adding REITs

Post by Lathund »

nisiprius wrote: 2) It is a fact that REITs have special rules that make them structurally different from other stocks. A REIT must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Thus, REITs are, among other things, a high-dividend category. A random web page I Googled--from NAREIT, which is the mouthpiece of the REIT industry--for February, 2017, the average yield of all Equity REITs was 3.83%, compared to 2.02% for the S&P. This certainly doesn't prove that a REIT tilt is good, but it does suggests that REITs are a well-defined special category--more well-defined and more special than small-cap value, for example.
How big a part in the lower correlation to the general stock market does the higher dividend yield play? Seeing as how the US stock markets don't pay very high dividends, would the benefit of adding, or tilting to, REITS be reduced if the difference in yield between REITS and the remaining equity allocation was smaller?

Asking from the perspective of an international investor (Swedish) with a home-country bias in equity allocation, meaning the average dividend yield of my portfolio is higher than that of someone with a global market-weighted portfolio, and even more so compared to someone with only US stocks. Swedish stocks yield 3,4%, world average is 2,4% whereas the US is 2% (According to http://www.starcapital.de/research/stockmarketvaluation). I currently have only index funds with no REIT tilt, mainly due to limited options in that regard; No access to cheap mutual funds investing in RE (Cheapest I have access to is 1% ER), and US-listed ETFs (such as VNQ) are not a good option for tax- and currency-related reasons.

I have generally found the data for including at least a small RE tilt to be somewhat compelling, but have avoided it for the above reasons. But the data I've seen has largely been from a US perspective, hence the question if I should take into account the higher yields from the rest of the portfolio in considering whether to indlude it or not. Or is the low(ish) correlation with the stock market fairly constant independent of dividends?
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Re: Justification for Adding REITs

Post by alex_686 »

Lathund wrote:How big a part in the lower correlation to the general stock market does the higher dividend yield play? Seeing as how the US stock markets don't pay very high dividends, would the benefit of adding, or tilting to, REITS be reduced if the difference in yield between REITS and the remaining equity allocation was smaller?
None. Whenever I have seen correlations being generated that have been using the total return indexes - indexes where the dividends are reinvested back into the index.

The higher yields question is more complex. Yields reflect long term expected inflation, tax policy (i.e, in the US stock buy backs are the tax advantage way of returning cash to investors, not stock dividends), growth prospects, etc. In short, comparing yields is kind of worthless - focus on total returns.

I don't know enough about your foreign tax issues. Currency risk with equity investing over the long period is pretty low in my opinion.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Justification for Adding REITs

Post by Valuethinker »

Lathund wrote:
nisiprius wrote: 2) It is a fact that REITs have special rules that make them structurally different from other stocks. A REIT must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Thus, REITs are, among other things, a high-dividend category. A random web page I Googled--from NAREIT, which is the mouthpiece of the REIT industry--for February, 2017, the average yield of all Equity REITs was 3.83%, compared to 2.02% for the S&P. This certainly doesn't prove that a REIT tilt is good, but it does suggests that REITs are a well-defined special category--more well-defined and more special than small-cap value, for example.
How big a part in the lower correlation to the general stock market does the higher dividend yield play? Seeing as how the US stock markets don't pay very high dividends, would the benefit of adding, or tilting to, REITS be reduced if the difference in yield between REITS and the remaining equity allocation was smaller?

Asking from the perspective of an international investor (Swedish) with a home-country bias in equity allocation, meaning the average dividend yield of my portfolio is higher than that of someone with a global market-weighted portfolio, and even more so compared to someone with only US stocks. Swedish stocks yield 3,4%, world average is 2,4% whereas the US is 2% (According to http://www.starcapital.de/research/stockmarketvaluation). I currently have only index funds with no REIT tilt, mainly due to limited options in that regard; No access to cheap mutual funds investing in RE (Cheapest I have access to is 1% ER), and US-listed ETFs (such as VNQ) are not a good option for tax- and currency-related reasons.

I have generally found the data for including at least a small RE tilt to be somewhat compelling, but have avoided it for the above reasons. But the data I've seen has largely been from a US perspective, hence the question if I should take into account the higher yields from the rest of the portfolio in considering whether to indlude it or not. Or is the low(ish) correlation with the stock market fairly constant independent of dividends?
Good question.

Checked SSRN? (academic papers abstracts)

Also Campbell Harvey website (Duke University)? Elroy Dimson and Paul Marsh are the doyens of these kinds of stats for global portfolios (they are professor emeriti of London Business School).

Anti Ilmanen is kind of a "go to" on asset returns-- both his CFA book (fairly cheap) and his John Wiley one (fairly expensive). Re sources of returns of different asset classes.

From a Swedish perspective I think you'd be ill-advised to diversify into US REITs without diversifying into global Property companies generally (even given that some or many are not REITs, are what an American calls a RE Operating Company/ REOC). And I think it's more important that you diversify globally (I have a gambler's love of the idea of Frontier Markets, but you can fairly omit them) and try to get into global small cap (even global small cap value) than the US REIT sector per se. After all entire US REIT (non mortgage) index is going to be not a lot more than 1-2 really big stocks on the US index (US index about 55% world market, REITs about 4% of US market?).

Tax considerations could kill the idea of investing in US REITs, depending on how Swedish taxes work (treaty with US? Can you reclaim US taxes against Swedish?).

Also beware issue of US estate taxes for direct investing. Basically, if you don't have to invest directly in USA, don't-- it can cost your estate a lot of money and, even if it does not, it can cost you a lot of money to get the proper tax return filed (people like KPMG do not come cheaply).
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Re: Justification for Adding REITs

Post by TinkerPDX »

livesoft wrote:I think the justification is that REITs are less correlated to TSM than some other things, so that REITs can be up or down whether they are found in TSM or not. That means, one can rebalance into them when they are low and rebalance out of them when they are high. Either way, one can make some money. So if you are just going to buy a REIT fund and let it sit, then there is no justification for owning a REIT fund [separately].
We've seen this comment a few times from you lately - maybe with respect to small value.

Would you agree that the basic concept works in the accumulation phase as well, as long as one buys according to AA, which in turn means buying less of what's up and more of what's down each time one buys?

I can't get my head around what the numerical equivalent would be between rebalancing at band X% and twice-monthly purchases of Y% of total assets. I think it'll be decades before I sell anything to rebalance since I am accumulating enough to hold the AA with purchasing; but i'm still convinced that even for an accumulating buy-and-hold investor, there is some value in slicing/tilting because it forces buying (relatively) low, even if not selling high.
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Re: Justification for Adding REITs

Post by Doc »

TinkerPDX wrote:I can't get my head around what the numerical equivalent would be between rebalancing at band X% and twice-monthly purchases of Y% of total assets.
You'll be more likely to get it into your head when you are withdrawing not accumulating.
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