Pairing REITs With Long-Term Treasuries

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Beensabu
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Pairing REITs With Long-Term Treasuries

Post by Beensabu » Fri Jan 12, 2018 8:52 pm

What do you think about pairing a REIT index fund with a long-term treasury fund? For example, if you had 10% REITs, then you'd have 10% long-term treasuries.

I've been playing around trying to come up with a 50/50 portfolio that may still have (read has had) a decent return for an accumulation period. That pairing plays into the one I came up with. Long-term treasuries, while also being relatively volatile, seem to moderate most of the "crash" risk of REITs, without hampering the recovery. At least, they did last time.

For instance, take a look at this: https://www.portfoliovisualizer.com/bac ... tion2_3=50

Thoughts?
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PFInterest
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Re: Pairing REITs With Long-Term Treasuries

Post by PFInterest » Fri Jan 12, 2018 9:04 pm

It sounds.... Not the best.

Beensabu
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Re: Pairing REITs With Long-Term Treasuries

Post by Beensabu » Fri Jan 12, 2018 9:09 pm

PFInterest wrote:
Fri Jan 12, 2018 9:04 pm
It sounds.... Not the best.
Okay. Why? Just to be clear, the link is not to the 50/50 portfolio I have in mind. That would have 10% REIT and 10% LTs, with remaining bond allocation as Total Bond. The link is just an example of how the treasuries may moderate the risk of including REITs in a portfolio at all, especially at 20% of equity allocation.
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Phineas J. Whoopee
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Re: Pairing REITs With Long-Term Treasuries

Post by Phineas J. Whoopee » Fri Jan 12, 2018 9:12 pm

Any investment-grade bonds will diminish the risk and expected return of a REIT portfolio.

What are you trying to achieve?

PJW

Beensabu
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Re: Pairing REITs With Long-Term Treasuries

Post by Beensabu » Fri Jan 12, 2018 9:17 pm

Phineas J. Whoopee wrote:
Fri Jan 12, 2018 9:12 pm
Any investment-grade bonds will diminish the risk and expected return of a REIT portfolio.

What are you trying to achieve?

PJW
Decent return with moderate risk in a diversified long term portfolio...

I guess I might as well post the allocation I have in mind to provide context:

US Stock Market 20.00%
International ex-US Small Cap 10.00%
Emerging Markets 10.00%
REIT 10.00%
Long Term Treasury 10.00%
Total US Bond Market 40.00%

It just seems that 10 REIT/ 10 LT might accomplish a return approaching that of 20 REIT, with less risk.
Last edited by Beensabu on Fri Jan 12, 2018 9:25 pm, edited 1 time in total.
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pastel
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Re: Pairing REITs With Long-Term Treasuries

Post by pastel » Fri Jan 12, 2018 9:21 pm

It's important to note that the financial crisis hit real estate particularly hard. This will not necessarily be the case with in a future recession. That is, this negative correlation to balance each other out may not hold in the future.

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nedsaid
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Re: Pairing REITs With Long-Term Treasuries

Post by nedsaid » Fri Jan 12, 2018 9:22 pm

Phineas J. Whoopee wrote:
Fri Jan 12, 2018 9:12 pm
Any investment-grade bonds will diminish the risk and expected return of a REIT portfolio.

What are you trying to achieve?

PJW
My guess is that REITs are there to hedge inflation and Long-Term Treasuries to hedge deflation. REITs would probably react to higher rates of inflation better than stocks would, but it is hard to say. I am just not as enthusiastic about REITs as I used to be. The yield chasers have made REITs pretty richly valued.
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jhfenton
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Re: Pairing REITs With Long-Term Treasuries

Post by jhfenton » Fri Jan 12, 2018 9:23 pm

If choosing two assets to pair together, I would not choose an equity sensitive to long-term interest rates and a bond sensitive to long-term interest rates. REITS do better in periods of slowly-rising rates than people think, but they are still sensitive to interest rates.

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Phineas J. Whoopee
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Re: Pairing REITs With Long-Term Treasuries

Post by Phineas J. Whoopee » Fri Jan 12, 2018 9:24 pm

nedsaid wrote:
Fri Jan 12, 2018 9:22 pm
...
My guess is that REITs are there to hedge inflation and Long-Term Treasuries to hedge deflation. REITs would probably react to higher rates of inflation better than stocks would, but it is hard to say. I am just not as enthusiastic about REITs as I used to be. The yield chasers have made REITs pretty richly valued.
If one is worried specifically about inflation, inflation-protected securities would seem to be a more straightforward way of addressing that risk.

PJW

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Phineas J. Whoopee
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Re: Pairing REITs With Long-Term Treasuries

Post by Phineas J. Whoopee » Fri Jan 12, 2018 9:27 pm

Beensabu wrote:
Fri Jan 12, 2018 9:17 pm
...
Decent return with moderate risk in a diversified long term portfolio...
...
Pending your telling us what decent and moderate mean, you should look at the way your portfolio works together as a whole, not isolated components representing only 20% of it.

PJW

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nedsaid
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Re: Pairing REITs With Long-Term Treasuries

Post by nedsaid » Fri Jan 12, 2018 9:33 pm

Phineas J. Whoopee wrote:
Fri Jan 12, 2018 9:24 pm
nedsaid wrote:
Fri Jan 12, 2018 9:22 pm
...
My guess is that REITs are there to hedge inflation and Long-Term Treasuries to hedge deflation. REITs would probably react to higher rates of inflation better than stocks would, but it is hard to say. I am just not as enthusiastic about REITs as I used to be. The yield chasers have made REITs pretty richly valued.
If one is worried specifically about inflation, inflation-protected securities would seem to be a more straightforward way of addressing that risk.

PJW
I do own TIPS too. I like to hedge against unexpected inflation on both the equity and on the debt side of my portfolio. Problem is we tend to want to fight the last war and time honored strategies might not work the way we think the next time the economy experiences unexpected inflation. For example, stocks can be hurt badly in the short term by inflation spikes as we saw in 1973-74. You will get your inflation adjustment from stocks but you might have to wait a while for it. You would think that REITs would react better than the broad stock market to unexpected inflation but each economic scenario is different. Hard to say exactly how the markets and the economy will react when the actual event happens. Hedging strategies are imperfect at best.
A fool and his money are good for business.

Beensabu
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Re: Pairing REITs With Long-Term Treasuries

Post by Beensabu » Fri Jan 12, 2018 9:41 pm

Phineas J. Whoopee wrote:
Fri Jan 12, 2018 9:27 pm
Pending your telling us what decent and moderate mean, you should look at the way your portfolio works together as a whole, not isolated components representing only 20% of it.

PJW
Right, sorry.

So REITs and equities as inflation protection. International equity exposure in small/mid and EM, as they reach different markets (foreign developed local and developing) than US large. Int'l small/mid has historically had same standard deviation as Int'l large, but with higher return. Long-term treasuries as deflation protection and equity crash mitigation. Total bond as overall risk reduction.

[EDIT: Link fixed...] Like the difference between these: https://www.portfoliovisualizer.com/bac ... 4&REIT3=10

Not much sacrifice in return, for much lower volatility.
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