Does the three fund portfolio provide adequate protection from inflation?

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Zardoz
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Zardoz »

vineviz wrote: Mon Sep 28, 2020 3:46 pm
garlandwhizzer wrote: Mon Sep 28, 2020 3:34 pm Also it's important to note that his 20% allocation to REITS as posted above is unlikely to be in a REIT Index like VNQ which is available to us, but rather to a selection of individual REITS carefully picked by him and his team.
Or even more likely, actual (i.e. directly held) real estate holdings.
Actually, Swensen specifically recommended the Vanguard REIT fund in "Unconventional Success":
As the preeminent practitioner of indexing for individual investors, Vanguard stands atop the industry in terms of excellence in tracking a wide variety of markets. Along with its market-replicating record of low-tracking-error products comes a well-deserved reputation for low fees. Like all of Vanguard’s index products, the Vanguard REIT Index Fund provides high-quality, low-cost exposure to its target market. The Vanguard REIT Index Fund imposes no sales charges, no purchase fees, and no distribution fees.
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Zardoz
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Zardoz »

garlandwhizzer wrote: Mon Sep 28, 2020 3:34 pm Zardoz wrote:
Swensen recommends 15% TIPS and 20% REITs in his reference portfolio, but he also notes the importance of creating a portfolio that aligns with your goals and philosophy:
Correct me if I'm wrong about this but I believe that Swensen has changed his portfolio recommendations in recent years, lowering REIT exposure. After very good US REIT performance in the 2000s, REITS have substantially underperformed TSM for about 7 years. All pension fund/endowment fund money managers, even ones with outstanding long term records like Swensen, are on performance leashes. When they underperform for a significant time period their jobs can be in peril so they cannot afford to wait too long for promised outperformance to show up. Swensen due to his success is on a long leash not a short one, but even he cannot ignore recent market setbacks. If indeed he did adjusted his REIT exposure it may be for this reason.
Ah yes, it looks like he did change the REIT recommendation from 20% to 15% (see viewtopic.php?t=91895), though in the Unconventional Success book he didn't present the 20% number as etched in stone:
Any number of portfolio allocations satisfy the mathematical and functional requirements of diversification and equity orientation. Table 3.1 contains an asset-class combination that serves as a reference portfolio for investors to consider.
Ironically, someone in the linked thread pointed out that after Swensen lowered his REIT recommendation, REITs actually overperformed for a while.

But I think the larger point that is most relevant to the current thread is that Swensen points out that holding some REITs within a portfolio can help provide an inflation hedge, if the investor commits to the investment as part of difersified portfolio and sticks with it. Personally I've found that to be easier said than done (as we see in so many discussions here on FOMO associated with owning small cap value and international in recent years).
Robot Monster
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

mookie wrote: Sun Sep 27, 2020 2:45 pm The prices of REITs, TIPS, and precious metals rises significantly during periods of high inflation?
Regarding how REITs might perform if inflation bubbles up, from an article in today's Wall Street Journal entitled, "How To Avoid Paying the Cruelest Tax: Inflation":
Utilities and real estate could face a double whammy. Many investors own them for their yield. If bond yields rise then they would look worse by comparison. And both regulator-controlled utility rates as well as long-term commercial leases could be slow to adjust to an uptick in prices even as borrowing costs rise.
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dml130
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by dml130 »

^
I don't have a subscription, but the subtitle refers to "places to hide" -- "some of them surprising". If you don't mind, what are those places to which they are referring?
Robot Monster
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by Robot Monster »

dml130 wrote: Fri Oct 02, 2020 5:40 pm ^
I don't have a subscription, but the subtitle refers to "places to hide" -- "some of them surprising". If you don't mind, what are those places to which they are referring?
I didn't find their recommendations that useful. They started off by recommending Chinese bonds, if that gives you a sense of things. I skimmed most of the article. They noted, "Retailers might be another good place to ride out an inflationary wave," (like Wal-Mart and Costco.)
“There are no answers, only choices.” ― Stanislav Lem, Solaris
dml130
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by dml130 »

Thanks for the reply; I agree, that seems not so helpful. It's surprising to me that they would talk up Chinese bonds over real estate as an inflation hedge, but maybe I'm missing something.
phxjcc
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Re: Does the three fund portfolio provide adequate protection from inflation?

Post by phxjcc »

Robot Monster wrote: Sun Sep 27, 2020 10:18 am
nisiprius wrote: Sun Sep 27, 2020 9:21 am [Something you edited out, wondering how assets like real estate performed during the 70's.]
Okay, so I dug something interesting up about how real estate performed. From 1970-1979, average compounded real returns (US$):

Global market portfolio-----1.65%
Equities broad---------------0.33%
Real estate----------------5.10%
Nongovernment bonds-----2.04%
Government bonds broad--1.72%
Commodities----------------22.02%
Source

Which was embedded in the paper, Historical Returns of the Market Portfolio
Inflation rates - 2 significant digits...

1979 11%
1980 13%
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