REITs for diversification

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Betelgeuse79
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REITs for diversification

Post by Betelgeuse79 »

Hello community,

I've just finished reading A Random Walk Down Wall Street by Malkiel, which I thought was excellent.

He recommends that REITs be part of one's portfolio for diversification purposes, as they have a tenuous positive correlation to common stock and have sometimes exhibited a negative one. For instance, while REITs dropped as much as stocks in 2008, during the 2000-2002 crisis they yielded positive returns while common stocks tanked.

The core ETF in my portfolio does have some REITs which amount to about 3.6%. Malkiel suggests for people in my age bracket to hold 10% in REITs in their portfolio.

What are your views on holding REITs as a way to possibly soften the blow of a market crash?

I should add that I do have two properties that generate monthly income from rent, but for some reason (perhaps wrongly so) I don't consider them as part of my portfolio.

Thanks in advance to those who will want to share their thoughts on this.

Stay safe!
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Re: REITs for diversification

Post by Bluce »

I currently hold Fido’s REIT, FREL. It’s only about 6% of my bond-heavy PF at this time.

I may retire soon and will up that percentage a bit. It will be for income, somewhat uncorrelated to bonds and stock divvies. Its dist yield is 3.16% currently.
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Re: REITs for diversification

Post by rossington »

Holding REIT's as an investment may be very suitable for you.
Holding them to "to possibly soften the blow of a market crash" would not be advisable as they are not immune to significant market downturns/crashes.
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Re: REITs for diversification

Post by nisiprius »

Malkiel's book convinced me to hold REITs, specifically the Vanguard REIT Index Fund (VGSLX, VNQ).

I felt distinctly betrayed in 2008-2009. It wasn't just that it plunged (blue line), it was that it plunged so much deeper than than the market overall (orange line).

Source

Image

Apologists say "yeah, but that was unusual, shouldn't have happened, and is not likely to happen again." Suuurrrre.

The point is that these are stocks in companies whose business is owning and operate commercial real estate, and now matter how special these businesses may be, you are still talking about a stock sector and a sector bet. The risk is certain to be higher, and claims that this is offset by imperfect correlation are ... to be examined carefully and skeptically.

Never forget that "low correlation" doesn't just mean "goes up when the stock market goes down." REITs really did do that in 2000-2002...

Image

...but, as in 2008-2009, low correlation also can mean "goes down more than the stock market when the stock market goes down." As well as goes up when the stock market goes up and goes down when the stock market goes down (because REITs are, after all, stocks).

The idea that MPT diversification, portfolios of imperfectly correlated assets, have lower volatility than the weighted average of their individual volatilities is a somewhat subtle statistical effect that shows up in averages over long periods of time. When you see something like REITs going up in 2000-2002 you shouldn't think that they will repeat that feat in every crash.

In fact, it was only last year that stocks fell -33%, but REITS fell -39%.

Image
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Re: REITs for diversification

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Re: REITs for diversification

Post by Wade Garrett »

Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 am What are your views on holding REITs as a way to possibly soften the blow of a market crash?
REITs may provide a minor diversification benefit in the future. But I wouldn't expect them to soften the blow of a market crash.

Why REITs over utlities? A case could be made for either. I've never viewed either as a real difference maker.
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Re: REITs for diversification

Post by Aged Maduro »

REITs are highly correlated to the stock market, because a REIT share is a stock. It is a share of a real estate investment company. So when there is a major downturn in equities, chances are your REITs will go down too. That is why i prefer direct ownership of rental real estate. When the market goes down, usually my rental properties keep chugging along producing rental income and price appreciation. I know being a landlord is not for everyone, but it has provided me with much better diversification as a hard asset that is outside of my basket of equities.
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Re: REITs for diversification

Post by vineviz »

Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 am What are your views on holding REITs as a way to possibly soften the blow of a market crash?
REITs are a demonstrably poor way to "soften the blow of a market crash". From 1994 to present, a portfolio of 100% Vanguard Total Stock Market had a maximum drawdown of -50.9% and a portfolio of 90% Vanguard Total Stock Market and 10% REITs had a maximum drawdown of -52.1%.

If the goal is to "soften the blow of a market crash", putting that 10% into US Treasury bonds would be much more effective and successful. Using either Vanguard Long-Term Treasury (VUSTX) or Vanguard Interm-Term Treasury (VFITX) would have reduced the drawdown to roughly -46%.
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Re: REITs for diversification

Post by anil686 »

vineviz wrote: Wed Apr 21, 2021 7:56 am
Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 am What are your views on holding REITs as a way to possibly soften the blow of a market crash?
REITs are a demonstrably poor way to "soften the blow of a market crash". From 1994 to present, a portfolio of 100% Vanguard Total Stock Market had a maximum drawdown of -50.9% and a portfolio of 90% Vanguard Total Stock Market and 10% REITs had a maximum drawdown of -52.1%.

If the goal is to "soften the blow of a market crash", putting that 10% into US Treasury bonds would be much more effective and successful. Using either Vanguard Long-Term Treasury (VUSTX) or Vanguard Interm-Term Treasury (VFITX) would have reduced the drawdown to roughly -46%.
This. And I would add Malkiel, Ellis, Ferri and others have written either books or recorded podcasts where pretty much they recommend a 3 fund portfolio for the most part. Sure, REITs could be added, sure small cap can be added. But if you read Malkiel and Ellis in the Elements of Investing - they recommend just TSM and TISM with real estate exposure in the form of your residence. I have read all of Ferri’s books years ago and had a slice in REITs but have dropped that over the past five years. TBH, it does not move the needle that much. Of course - that’s JMO and REITs have their passionate fan base just like small cap - again JMO....
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Re: REITs for diversification

Post by Tom_T »

The flip side of "softening the blow of a market crash" is that the Vanguard REIT fund has trailed the S&P 500 fund by a lot over the past five years, according to Vanguard's comparison tool. I personally would not be thrilled if I bet on a market sector and ended up worse off than if I had just stuck with the broad index. As others have said, "soften the blow" with bonds, not stocks.
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Re: REITs for diversification

Post by Silverado »

Tom_T wrote: Wed Apr 21, 2021 8:07 am The flip side of "softening the blow of a market crash" is that the Vanguard REIT fund has trailed the S&P 500 fund by a lot over the past five years, according to Vanguard's comparison tool. I personally would not be thrilled if I bet on a market sector and ended up worse off than if I had just stuck with the broad index. As others have said, "soften the blow" with bonds, not stocks.
Five years is fairly short, and no surprise it has not competed with the SP500 given the small number of special sector stocks it holds. We’ve had the Vanguard REIT Index VGSLX since early 2005 when a 401k was rolled over with a job change. It has gone up, gone down, gone down more, gone up some, gone down some, and so on. Certainly has not bolstered returns much, and as Nisi points out, it has not shored up declines very well either. 16 years in, we will see what the next 16 brings.
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Re: REITs for diversification

Post by CloseEnough »

OP: with two real estate rental properties you already have some of the benefits of real estate for diversification. Why not include those holdings when evaluating your investment portfolio? Anyway, my observation is that on this forum REITS are not favored as a way to diversify. But, I’d suggest you continue to research it as their are other legitimate viewpoints on the value of REITs. If you want exposure to real estate that’s not correlated to public markets there may be better alternatives than REITs, such as your direct holding of rental properties. I think real estate is one area where there’s an argument for management over indexing, but again that’s not the prevailing view here. Good luck with your decisions.
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Re: REITs for diversification

Post by Triple digit golfer »

Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 amWhat are your views on holding REITs as a way to possibly soften the blow of a market crash?
Stocks are a terrible way to soften the blow of a stock crash. In the last couple large crashes, REITs not only didn't soften the blow, they made it worse.

REITs are not special. They're a stock sector. Placing additional funds in them is a sector bet. I don't like sector bets. Some people do and that is fine.

To soften the blow of a stock market crash, put some money in high quality investment grade or government bonds or just plain old cash.
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Re: REITs for diversification

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Tom_T wrote: Wed Apr 21, 2021 8:07 amThe flip side of "softening the blow of a market crash" is that the Vanguard REIT fund has trailed the S&P 500 fund by a lot over the past five years, according to Vanguard's comparison tool. I personally would not be thrilled if I bet on a market sector and ended up worse off than if I had just stuck with the broad index. As others have said, "soften the blow" with bonds, not stocks.
+1. Good advice here!
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Re: REITs for diversification

Post by Doc »

vineviz wrote: Wed Apr 21, 2021 7:56 am REITs are a demonstrably poor way to "soften the blow of a market crash".
In a link given somewhere: viewtopic.php?f=1&t=346582
Valuethinker wrote:David Swensen also takes the reader through the private REIT "industry" and the harm it causes investors. No doubt Larry Swedroe has something pithy to say in his books.
Swedroe wrote:Instead, the winning strategy is to hold as much equity as possible in taxable accounts and hold taxable fixed-income investments and tax inefficient REITs in tax deferred accounts.
"The Only Guide to a Winning Investment Strategy You'll Ever Need" Swedroe & Hempen first edition p203
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Re: REITs for diversification

Post by vineviz »

Doc wrote: Wed Apr 21, 2021 9:54 am
vineviz wrote: Wed Apr 21, 2021 7:56 am REITs are a demonstrably poor way to "soften the blow of a market crash".
In a link given somewhere: viewtopic.php?f=1&t=346582
Valuethinker wrote:David Swensen also takes the reader through the private REIT "industry" and the harm it causes investors. No doubt Larry Swedroe has something pithy to say in his books.
Swedroe wrote:Instead, the winning strategy is to hold as much equity as possible in taxable accounts and hold taxable fixed-income investments and tax inefficient REITs in tax deferred accounts.
"The Only Guide to a Winning Investment Strategy You'll Ever Need" Swedroe & Hempen first edition p203
REITs are a demonstrably poor way to "soften the blow of a market crash".
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Re: REITs for diversification

Post by Leif »

I have a total market fund, which has some REITs. However to provide asset class level diversification. In addition, they more provide a bit of protection in case of inflation.

I've read a few here have decided not to stay the course on REITs. I'm not sure if that is their calculation on the long term effects of the pandemic.

I keep them in my Roth account for long term appreciation.
Last edited by Leif on Thu Apr 22, 2021 10:53 am, edited 1 time in total.
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Re: REITs for diversification

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Doc wrote: Wed Apr 21, 2021 9:54 am
vineviz wrote: Wed Apr 21, 2021 7:56 am REITs are a demonstrably poor way to "soften the blow of a market crash".
In a link given somewhere: viewtopic.php?f=1&t=346582
Valuethinker wrote:David Swensen also takes the reader through the private REIT "industry" and the harm it causes investors. No doubt Larry Swedroe has something pithy to say in his books.
Swedroe wrote:Instead, the winning strategy is to hold as much equity as possible in taxable accounts and hold taxable fixed-income investments and tax inefficient REITs in tax deferred accounts.
"The Only Guide to a Winning Investment Strategy You'll Ever Need" Swedroe & Hempen first edition p203
Books get out-dated quickly.

2020, REITS were awful to protect from market downturn:

US Stocks: -20% Max Drawdown / 20% CAGR
REITS: -25% Max Drawdown / -4.78% CAGR

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: REITs for diversification

Post by CloseEnough »

Looking at one year, 2020, for example, or even 5 years, is practically meaningless for this discussion.
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Re: REITs for diversification

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Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 am Hello community,

I've just finished reading A Random Walk Down Wall Street by Malkiel, which I thought was excellent.

He recommends that REITs be part of one's portfolio for diversification purposes, as they have a tenuous positive correlation to common stock and have sometimes exhibited a negative one. For instance, while REITs dropped as much as stocks in 2008, during the 2000-2002 crisis they yielded positive returns while common stocks tanked.

The core ETF in my portfolio does have some REITs which amount to about 3.6%. Malkiel suggests for people in my age bracket to hold 10% in REITs in their portfolio.

What are your views on holding REITs as a way to possibly soften the blow of a market crash?
Look at the Top Holdings of Vanguard's REIT Index fund. You might expect companies that own apartments, offices, and stores but you'd be (mostly) wrong. The REIT holdings are now mostly data warehouses, mobile tower infrastructure, logistics. If you want to overweight those I think you'd need some sort of theory to explain why you should. One argument in the past was that a lot of real estate is privately held so overweighting helped better reflect true market capitalization. That no longer applies with current construction of REIT index. So yes I think his advice might be out of date, or maybe he's recommending something other than Vanguard REIT. Would be an interesting area for Rick Ferri to explore with one of his guests on his podcast.
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Re: REITs for diversification

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CloseEnough wrote: Wed Apr 21, 2021 10:15 am Looking at one year, 2020, for example, or even 5 years, is practically meaningless for this discussion.
It's certainly not meaningless if the claim is that REITs protect against market downturns.

You don't get to just throw out the parts of the data set you don't like.
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Re: REITs for diversification

Post by CloseEnough »

Agree you don't get to throw out the parts of the data set you don't like. Not that I don't like the one year data, it is fine. I just think it is a lot more meaningful, and less misleading, to look at a much longer period if you are going to use historical data to analyze the question asked in this thread. So it actually is practically meaningless to just look at a year, which is basically just cherry picking a very short recent time period. Does anybody really think this issue is decided at all by one year return data? I don't think it is, I would want to look at a meaningful period of time and multiple downturns.
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Re: REITs for diversification

Post by mrpotatoheadsays »

Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 am What are your views on holding REITs as a way to possibly soften the blow of a market crash?
REITs will likely not soften the blow of a market crash; they are not reversely correlated.

REITs add diversity, but long-term analysis shows no notable performance benefit over "the market", only a slight reduction of risk.

REITs may make sense if you are a market timer. In 1998, REITs underperformed the S&P 500 by 45.6%; in 2000, REITs outperformed the S&P 500 by 40.1%.

For these reasons, I do not invest in REITs unless I am timing... and I haven't timed the market since the bottom of the great recession.

To soften the blow of a market crash, I invest in US Treasury bonds.


References:
https://paulmerriman.com/wp-content/upl ... 0-2020.pdf
http://online.wsj.com/public/resources/ ... 15year.pdf
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Re: REITs for diversification

Post by tomd37 »

I was just looking at The Callan Periodic Table of Investment Returns. Annual returns for key indices ranked in order of performance 2001-2020. Real estate was ranked as follows:

4 times #1, 2 times #2, 3 times #3, 2 times #4, #5, #6, #7, 1 time #8, and 2 times #9 (last place).

Markets rated - Shown in 2020 order just as an example (even though last in 2020, I hold an additional 10% of my equity in REIT Index and have for many of those 20 years).

Small cap equity
Large cap equity
Emerging market equity
Global ex-US fixed income
Developed ex-US equity
US fixed income
High yield
Cash equivalent
Real estate

Edited to add: This was pretty useless info as I presented. Might have been better just to suggest researching subject table for those that have never seen it before. Excellent representation how the returns on key indices vary from year to year. Some pretty good examples of up one year and down the next. :oops:
Last edited by tomd37 on Wed Apr 21, 2021 9:06 pm, edited 1 time in total.
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Re: REITs for diversification

Post by abuss368 »

REITs historically had a lower correlation to the overall markets. However correlation does fluctuate and is not constant.

Did REITs help in the 2000 technology bubble? Yes they did.

Did REITs help in the 2008 Great Recession? Not at all and dropped further than the overall markets.

REITs are included in Total Stock at market weight as well.

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Re: REITs for diversification

Post by abuss368 »

REITs were all the rage years ago. Not so sure they are as popular any longer

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Re: REITs for diversification

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CloseEnough wrote: Wed Apr 21, 2021 11:36 am I would want to look at a meaningful period of time and multiple downturns.
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Re: REITs for diversification

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mrpotatoheadsays wrote: Wed Apr 21, 2021 12:01 pm To soften the blow of a market crash, I invest in US Treasury bonds.
Yes.

REITS are equities.

The best way to reduce equity risk is to reduce equity exposure, not add more equities.
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Re: REITs for diversification

Post by abuss368 »

watchnerd wrote: Wed Apr 21, 2021 8:36 pm
mrpotatoheadsays wrote: Wed Apr 21, 2021 12:01 pm To soften the blow of a market crash, I invest in US Treasury bonds.
Yes.

REITS are equities.

The best way to reduce equity risk is to reduce equity exposure, not add more equities.
I would agree. What concerns me is when I read posts comparing and relating REITs to bonds as a bond substitute.

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Re: REITs for diversification

Post by watchnerd »

abuss368 wrote: Wed Apr 21, 2021 8:48 pm

I would agree. What concerns me is when I read posts comparing and relating REITs to bonds as a bond substitute.

Tony
Those posts are not grounded in reality.

REITs are not in the category of "risk-free" asset.
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Re: REITs for diversification

Post by nisiprius »

CloseEnough wrote: Wed Apr 21, 2021 11:36 am Agree you don't get to throw out the parts of the data set you don't like. Not that I don't like the one year data, it is fine. I just think it is a lot more meaningful, and less misleading, to look at a much longer period if you are going to use historical data to analyze the question asked in this thread. So it actually is practically meaningless to just look at a year, which is basically just cherry picking a very short recent time period. Does anybody really think this issue is decided at all by one year return data? I don't think it is, I would want to look at a meaningful period of time and multiple downturns.
Since inception of the Vanguard REIT Index fund in 1996, there have been exactly three major downturns: 2000-2002, 2008-2009, and early 2020. Adding Vanguard REIT index to Total Stock made the drawdown better in 2000-2002, worse in 2008-2009, and worse in 2020. So it hurt, two times out of three.

The original poster isn't asking about improving the Sharpe ratio through MPT diversification over long periods of time, he's asking about softening the blow of market crashes.
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Re: REITs for diversification

Post by ronno2018 »

I have some VNQ and iShares gold (IAU) for diversification. It is not ideal but I think worthwhile. I suppose I think telecom towers and datacentres will have less value over time (due to maximization of footprints) but I am not too worried as the bulk of my portfolio is in stonks and bonds...
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Re: REITs for diversification

Post by abuss368 »

ronno2018 wrote: Wed Apr 21, 2021 9:34 pm I have some VNQ and iShares gold (IAU) for diversification. It is not ideal but I think worthwhile. I suppose I think telecom towers and datacentres will have less value over time (due to maximization of footprints) but I am not too worried as the bulk of my portfolio is in stonks and bonds...
Would cell towers and data centers have MORE value over time as the world continues to move in the direction of technology?

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Re: REITs for diversification

Post by watchnerd »

abuss368 wrote: Wed Apr 21, 2021 10:03 pm
ronno2018 wrote: Wed Apr 21, 2021 9:34 pm I have some VNQ and iShares gold (IAU) for diversification. It is not ideal but I think worthwhile. I suppose I think telecom towers and datacentres will have less value over time (due to maximization of footprints) but I am not too worried as the bulk of my portfolio is in stonks and bonds...
Would cell towers and data centers have MORE value over time as the world continues to move in the direction of technology?

Tony
It's a real estate business in both cases.

It's all about revenue per square foot / meter.

Which means the existing towers can handle more signal density on the same real estate.

Data centers, though, are on life support because of public clouds.

Full disclosure

I have private equity investments in cell towers and my megacorp employer is one of the largest public cloud providers.
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Re: REITs for diversification

Post by CloseEnough »

OP: this thread has extensive discussion relating to your question.

viewtopic.php?f=10&t=168652&start=100
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Re: REITs for diversification

Post by Betelgeuse79 »

Thanks everyone for sharing your informed views on this topic. This forum is truly an amazing resource for investors, especially those at the beginning of their investing path like me!
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Re: REITs for diversification

Post by CurlyDave »

Aged Maduro wrote: Wed Apr 21, 2021 7:48 am REITs are highly correlated to the stock market, because a REIT share is a stock. It is a share of a real estate investment company. So when there is a major downturn in equities, chances are your REITs will go down too. That is why i prefer direct ownership of rental real estate. When the market goes down, usually my rental properties keep chugging along producing rental income and price appreciation. I know being a landlord is not for everyone, but it has provided me with much better diversification as a hard asset that is outside of my basket of equities.
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Re: REITs for diversification

Post by Robot Monster »

Aged Maduro wrote: Wed Apr 21, 2021 7:48 am REITs are highly correlated to the stock market, because a REIT share is a stock. It is a share of a real estate investment company. So when there is a major downturn in equities, chances are your REITs will go down too. That is why i prefer direct ownership of rental real estate. When the market goes down, usually my rental properties keep chugging along producing rental income and price appreciation. I know being a landlord is not for everyone, but it has provided me with much better diversification as a hard asset that is outside of my basket of equities.
This confused me. Let's say I'm a billionaire and buy lots of properties. Let's say my billionaire brother does the same thing, buys equivalent properties, but he creates a REIT company to own them. Are our two investments really going to behave differently?

Edit: Because "REITs are required to pay out at least 90% of their taxable income to shareholders annually," to make the brothers equivalent, let's say they each pay out the same amount of taxable income annually.
Last edited by Robot Monster on Thu Apr 22, 2021 10:26 am, edited 1 time in total.
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Re: REITs for diversification

Post by watchnerd »

Robot Monster wrote: Thu Apr 22, 2021 9:56 am
Aged Maduro wrote: Wed Apr 21, 2021 7:48 am REITs are highly correlated to the stock market, because a REIT share is a stock. It is a share of a real estate investment company. So when there is a major downturn in equities, chances are your REITs will go down too. That is why i prefer direct ownership of rental real estate. When the market goes down, usually my rental properties keep chugging along producing rental income and price appreciation. I know being a landlord is not for everyone, but it has provided me with much better diversification as a hard asset that is outside of my basket of equities.
This confused me. Let's say I'm a billionaire and buy lots of properties. Let's say my billionaire brother does the same thing, buys equivalent properties, but he creates a REIT company to own them. Are our two investments really going to behave differently?
Don't REITs have cash flow pay out requirements that are different from other ownership structures?
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Re: REITs for diversification

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Great learning here
https://www.reit.com/

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Re: REITs for diversification

Post by imak »

For what it's worth, global REIT ETFs do provide diversification benefit and exhibit varying correlation with global equities.

As per portfolio visualizer, rolling 12-month correlations (varying ranges) for the past 5 years:
REET ETF correlation with VT : 0.4 to 0.8
RWO ETF correlation with VT : 0.4 to 0.8

Global REITs also exhibit lower concentration in top holdings compared to VNQ: about 25% of portfolio in Top 10 holdings for REET versus 45% in Top 10 holdings for VNQ. Also, number of holdings are almost double (299 vs 174) compared to VNQ which helps with sub-sector diversification.
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Re: REITs for diversification

Post by Robot Monster »

watchnerd wrote: Thu Apr 22, 2021 9:59 am
Robot Monster wrote: Thu Apr 22, 2021 9:56 am
Aged Maduro wrote: Wed Apr 21, 2021 7:48 am REITs are highly correlated to the stock market, because a REIT share is a stock. It is a share of a real estate investment company. So when there is a major downturn in equities, chances are your REITs will go down too. That is why i prefer direct ownership of rental real estate. When the market goes down, usually my rental properties keep chugging along producing rental income and price appreciation. I know being a landlord is not for everyone, but it has provided me with much better diversification as a hard asset that is outside of my basket of equities.
This confused me. Let's say I'm a billionaire and buy lots of properties. Let's say my billionaire brother does the same thing, buys equivalent properties, but he creates a REIT company to own them. Are our two investments really going to behave differently?
Don't REITs have cash flow pay out requirements that are different from other ownership structures?
Okay, I fixed the scenario to cover that, I think. Thanks.
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Re: REITs for diversification

Post by nisiprius »

imak wrote: Thu Apr 22, 2021 10:20 am For what it's worth, global REIT ETFs do provide diversification benefit and exhibit varying correlation with global equities.
As per portfolio visualizer, rolling 12-month correlations (varying ranges) for the past 5 years:
REET ETF correlation with VT : 0.4 to 0.8
RWO ETF correlation with VT : 0.4 to 0.8
But that isn't what the original poster is asking. He is asking a different question: are REITs likely to "soften the blow of a market crash."

Since REET did not exist during 2008-2009 I am going to look at RWO. And the answer is that adding RWO to VT would not have softened the blow of a market crash during either of the two crashes that have occurred since RWO became available.PortfolioVisualizer shows us:

--from July 2008 through the present, the maximum drawdown was -45.96% for VT, but -57.74% for RWO. So RWO would have made things worse.

--in early 2020, the maximum drawdown was -22.15% for VT, but -30.26% for RWO, so again, RWO would would have made things worse.

And we take a balanced portfolio of 60% VT, 40% BND, and see what would have happened if we had replaced a quarter of VT with RWO--i.e. 45% VT, 15% RWO, 40% BND--then in both the 2008-2009 and 2020 crashes,
  • It would have made darn little difference, and
  • It would not have "softened the blow" at all, exactly the opposite.
Source

Image

Image
Last edited by nisiprius on Thu Apr 22, 2021 12:48 pm, edited 1 time in total.
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Re: REITs for diversification

Post by watchnerd »

nisiprius wrote: Thu Apr 22, 2021 11:59 am
imak wrote: Thu Apr 22, 2021 10:20 am For what it's worth, global REIT ETFs do provide diversification benefit and exhibit varying correlation with global equities.
As per portfolio visualizer, rolling 12-month correlations (varying ranges) for the past 5 years:
REET ETF correlation with VT : 0.4 to 0.8
RWO ETF correlation with VT : 0.4 to 0.8
But that isn't what the original poster is asking. He is asking a different question: are REITs likely to "soften the blow of a market crash."

Since REET did not exist during 2008-2009 I am going to look at RWO. And the answer is that adding RWO to VT would not have softened the blow of a market crash during either of the two crashes that have occurred since RWO became available.

Source for drawdown numbers

From July 2008 through the present, the maximum drawdown was -45.96% for VT, but -57.74% for RWO. So RWO would have made things worse.

In early 2020, the maximum drawdown was -22.15% for VT, but -30.26% for RWO, so again, RWO would would have made things worse.

And we take a balanced portfolio of 60% VT, 40% BND, and see what would have happened if we had replaced a quarter of VT with RWO--i.e. 45% VT, 15% RWO, 40% BND--then in both the 2008-2009 and 2020 crashes,
  • It would have made darn little difference, and
  • It would not have "softened the blow" at all, exactly the opposite.
Interestingly, instead of putting 15% in REITs, putting 15% in healthcare (VGHAX) *would* have softened the blow.

Note:

I'm not saying that over-weighting healthcare is a future path to better risk-adjusted returns.

Just that stock sector tilts increase the dispersion of possible outcomes (duh) -- sometimes they're better than the market, often times worse.
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Re: REITs for diversification

Post by secondopinion »

Betelgeuse79 wrote: Wed Apr 21, 2021 1:53 am Hello community,

I've just finished reading A Random Walk Down Wall Street by Malkiel, which I thought was excellent.

He recommends that REITs be part of one's portfolio for diversification purposes, as they have a tenuous positive correlation to common stock and have sometimes exhibited a negative one. For instance, while REITs dropped as much as stocks in 2008, during the 2000-2002 crisis they yielded positive returns while common stocks tanked.

The core ETF in my portfolio does have some REITs which amount to about 3.6%. Malkiel suggests for people in my age bracket to hold 10% in REITs in their portfolio.

What are your views on holding REITs as a way to possibly soften the blow of a market crash?
REITs will not cushion much of anything; they have risks like and unlike stocks. Like many posters here, I agree that they can actually make matters worse in the portfolio analytics.

Of course, if you believe in REITs because rentable buildings are essential businesses, then I cannot argue that point. If one has a very sound argument for an investment outside of the norm, then go ahead; just make sure it is sound and that any failure will not end up bankrupting you. Whether value, growth, tech, small-cap, REIT, single stocks, or anything else, you must have a sound reason for the isolated selection and deviation from the market (it does not need to be backed by history but it must be backed by facts).
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Re: REITs for diversification

Post by watchnerd »

secondopinion wrote: Thu Apr 22, 2021 4:29 pm Of course, if you believe in REITs because rentable buildings are essential businesses, then I cannot argue that point. If one has a very sound argument for an investment outside of the norm, then go ahead; just make sure it is sound and that any failure will not end up bankrupting you. Whether value, growth, tech, small-cap, REIT, single stocks, or anything else, you must have a sound reason for the isolated selection and deviation from the market (it does not need to be backed by history but it must be backed by facts).
I believe rentable buildings are an essential business.

But I believe a lot of things, just like REITs, are essential businesses and I'm happy to hold them at market weight.
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Re: REITs for diversification

Post by secondopinion »

watchnerd wrote: Thu Apr 22, 2021 5:33 pm
secondopinion wrote: Thu Apr 22, 2021 4:29 pm Of course, if you believe in REITs because rentable buildings are essential businesses, then I cannot argue that point. If one has a very sound argument for an investment outside of the norm, then go ahead; just make sure it is sound and that any failure will not end up bankrupting you. Whether value, growth, tech, small-cap, REIT, single stocks, or anything else, you must have a sound reason for the isolated selection and deviation from the market (it does not need to be backed by history but it must be backed by facts).
I believe rentable buildings are an essential business.

But I believe a lot of things, just like REITs, are essential businesses and I'm happy to hold them at market weight.
Right. When one does not want to take a position in anything, market-weight is best.

I am just saying that making sound decisions are the only requirement to good investing; it is up to the investor to make them and accept the results.
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Re: REITs for diversification

Post by abuss368 »

Robot Monster wrote: Thu Apr 22, 2021 9:56 am
Aged Maduro wrote: Wed Apr 21, 2021 7:48 am REITs are highly correlated to the stock market, because a REIT share is a stock. It is a share of a real estate investment company. So when there is a major downturn in equities, chances are your REITs will go down too. That is why i prefer direct ownership of rental real estate. When the market goes down, usually my rental properties keep chugging along producing rental income and price appreciation. I know being a landlord is not for everyone, but it has provided me with much better diversification as a hard asset that is outside of my basket of equities.
This confused me. Let's say I'm a billionaire and buy lots of properties. Let's say my billionaire brother does the same thing, buys equivalent properties, but he creates a REIT company to own them. Are our two investments really going to behave differently?

Edit: Because "REITs are required to pay out at least 90% of their taxable income to shareholders annually," to make the brothers equivalent, let's say they each pay out the same amount of taxable income annually.
They shouldn’t as the underlying assets are the same. The markets may move the share prices higher or lower compared to the underlying asset values in the short term. Over the long term, it should balance out.

Tony
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Re: REITs for diversification

Post by abuss368 »

mrmass wrote: Thu Apr 22, 2021 10:07 am Great learning here
https://www.reit.com/

Seeking Alpha love all things dividends/REITS.
https://seekingalpha.com
I have learned much from REIT.com

In fact, I subscribed to the free REIT magazine for many years and learned even more.

Tony
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Re: REITs for diversification

Post by abuss368 »

watchnerd wrote: Thu Apr 22, 2021 12:35 pm
Interestingly, instead of putting 15% in REITs, putting 15% in healthcare (VGHAX) *would* have softened the blow.

Note:

I'm not saying that over-weighting healthcare is a future path to better risk-adjusted returns.

Just that stock sector tilts increase the dispersion of possible outcomes (duh) -- sometimes they're better than the market, often times worse.
I have a colleague who holds:

Total Stock
Vanguard High Dividend
Vanguard REIT
IShares Extended Technology
Vanguard Healthcare
Vanguard Energy (at times)
Vangurd Total Bond

Whatever is on sale he buys. Been doing this 30 years. Has done very very well for himself. Has no interest in overseas markets.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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