Larry Swedroe: Real Estate Isn’t Special

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Random Walker
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Larry Swedroe: Real Estate Isn’t Special

Post by Random Walker » Mon Apr 30, 2018 8:37 am

http://www.etf.com/sections/index-inves ... nopaging=1

Many of us consider REITs a unique asset class, and an excellent portfolio diversifier. But studies have shown that the returns of REITs are explained underlying factors. The Fama French 5 factor model explains REIT returns very well. REITs behave like a portfolio comprised of 60% small value equity and 40% high yield long term bonds. The conclusion of the first paper reviewed by Larry is that “if one were taking a factor based approach to asset allocation, then real estate would not be considered a separate source of return”.
There is likely more efficient and direct ways to access these factors than REITs, and better options available as true diversifiers.

Dave

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by staythecourse » Mon Apr 30, 2018 8:50 am

Random Walker wrote:
Mon Apr 30, 2018 8:37 am
http://www.etf.com/sections/index-inves ... nopaging=1

Many of us consider REITs a unique asset class, and an excellent portfolio diversifier. But studies have shown that the returns of REITs are explained underlying factors. The Fama French 5 factor model explains REIT returns very well. REITs behave like a portfolio comprised of 60% small value equity and 40% high yield long term bonds. The conclusion of the first paper reviewed by Larry is that “if one were taking a factor based approach to asset allocation, then real estate would not be considered a separate source of return”.
There is likely more efficient and direct ways to access these factors than REITs, and better options available as true diversifiers.

Dave
Interesting how all the studies pooh poohing ANY asset class always seem to be when the asset class is down. Not saying REITS are any good, but have a golden rule, "Never decide the rationale of having any asset class negatively when it is down or positively when it is up".

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Random Walker
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Random Walker » Mon Apr 30, 2018 9:00 am

The two studies cited covered 29 and 38 years, so what REITs doing currently I think irrelevant. The point of the article is not to diss REITs. Rather it is to show that they are not unique. They represent a certain combination of underlying known factors. Investing has evolved from looking at asset classes to the factors underlying asset classes that drive returns.

Dave

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by 9-5 Suited » Mon Apr 30, 2018 9:06 am

My 5% allocation to VNQ has been the one aspect of my AA I'm least confident in and go back and forth on somewhat often. And my feelings on it are not correlated with the current performance, just a general skepticism that low correlations are a good enough reason to own a sector (since most individual sectors will not be perfectly correlated with the market).

This article is presented in a highly thoughtful way consistent with most everything Larry does, and the part at the end about the replica SV/LTB portfolio was especially interesting. I'll be adding it to my bank of information to consider if at any point in the future I opt to make some updates to my IPS and AA. For now, staying the course.

Thanks for sharing!!

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by cfs » Mon Apr 30, 2018 10:13 am

Leaders, good Monday to you. Just back from my LUng Distance Workout and now we can start the conversation here. Thanks Mister Dave for the link to yet another good article by Mister Swedroe (he is no longer active in this forum, except short sporadic entries from time to time, our loss. In reference to Reits, I had those in our portfolio but sold them about twenty years ago. Those Reits are all over the Lazy Portfolios (listed in the BH Wiki), will those be adjusted based on the new and improved data? My Reits-Less portfolio is doing fine, thank you. Good luck, y gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by kosomoto » Mon Apr 30, 2018 10:54 am

REITs are inherently special because the underlying companies have tax advantages that ordinary companies do not. When combined with retirement accounts REITs are great.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by KyleAAA » Mon Apr 30, 2018 10:56 am

A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by kosomoto » Mon Apr 30, 2018 11:03 am

KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
Also this. Real estate direct investments are extremely special in the fact that taxes are done way differently. They also provide leverage that cannot be subject to a margin call unlike stock leverage.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Random Walker » Mon Apr 30, 2018 11:18 am

KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
I don’t think this is just a nitpick. I think it’s a major league concern. The stocks of commodity producers I believe behave more like stocks than commodities. REITs behave to a big extent as SV equities. When something gets “financialized”, it’s uniqueness seems to evaporate. As I’ve evolved into a major league factor and alt investor, this is a bit of a nagging concern for me. Of course my concern is greatest for the behavioral anomalies. Risk based sources of return should rationally persist. I do believe though that human behavior is tenaciously persistent, there are limits to arbitrage, and the data is so good, that I’ve invested in TS and CS Momentum as well. But the “finamcialization” issue always concerns me: William Bernstein’s Skating Where The Puck Was.

Dave

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Angst » Mon Apr 30, 2018 1:55 pm

Random Walker wrote:
Mon Apr 30, 2018 11:18 am
When something gets “financialized”, it’s uniqueness seems to evaporate. As I’ve evolved into a major league factor and alt investor, this is a bit of a nagging concern for me. Of course my concern is greatest for the behavioral anomalies. Risk based sources of return should rationally persist. I do believe though that human behavior is tenaciously persistent, there are limits to arbitrage, and the data is so good, that I’ve invested in TS and CS Momentum as well. But the “financialization” issue always concerns me: William Bernstein’s Skating Where The Puck Was.

Dave
Me too, although I think that Real Estate vis-à-vis a static, indexed portfolio of REITs is a lot less murky and "financialized" than many of the other alts, e.g. compared to something like commodities vis-à-vis a rolling portfolio of futures contracts (CCF), but then it's been a good while since anyone liked to suggest commodities when promoting alternatives. ;)

Nope, I'm in no hurry at all to dump my mix of US/Int'l REIT simply because it presently appears to regress nicely into a 60/40 portfolio of SV and LT HY bonds, at least maybe not until we're able to conclusively prove whether things like butter and coffee are really good or bad for us.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by lack_ey » Mon Apr 30, 2018 2:11 pm

"Isn't special" here is in the context of a multifactor regression that includes bond factors too, looking at statistical significance of performance over the factor exposures. Most everything that is stocks or bonds wouldn't be special in that sense. This is one lens with which to understand returns but not the only one.

The results don't imply that tilting away from the market using REIT funds is bad, just that you may be able to capture most of those exposures in other ways, possibly with higher return (maybe not; alpha here like it usually does rarely comes out significant and generally is unstable anyway and we never know) and definitely without taking as much dedicated idiosyncratic sector risk. That is, unless what you're after is the sector risk specifically and the other properties. Part of the argument for using (equity) REITs is for exposure to real assets, which at least in theory could be useful to some in certain inflationary environments, and this is not addressed here.

REITs are also notably one way of taking substantial term risk within equities, though the other exposures usually dominate that component. Or at least, that's been the past behavior. These relationships can shift.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Random Walker » Mon Apr 30, 2018 2:37 pm

It was a bit traumatic for me to dump the REITs in favor of some of the newer alternatives. Having 1.5% in international REITs, I liked the idea that somewhere I had a piece of a villa on the French Riviera.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Theoretical » Mon Apr 30, 2018 3:10 pm

I would not be surprised if an Interval fund emerged in a few years that directly owned and managed real estate, where the fundholders are a particular class of ownership with rights to both the property management fees and the capital appreciation.

Actual ownership is special, but I think financialized assets are not going to be.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by 209south » Mon Apr 30, 2018 3:25 pm

I'm struggling intellectually with the observation that the return profile of REITs is 40% impacted by longer-term high yield bonds, but Larry has always argued against including high yield bonds in a portfolio...what part of a Larry portfolio (70% treasuries + 30% SV) mimics that 40% high yield performance? Not saying it is good or bad, but perhaps it is 'different' enough to provide diversification value.

My portfolio is 30-60-10 equities-fixed income-REITs (1/2 intl), showing that I'm partly but not fully-persuaded that REITs will perform 'more like real estate than stocks' over the very long run.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by columbia » Mon Apr 30, 2018 3:26 pm

I think the only special accumulation-stage (non cash) investment is TIAA Traditional. If folks have access to one of the flavors, they should probably use that and stop chasing the dragon with other far less tangible and reliable alternative investment options.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by lack_ey » Mon Apr 30, 2018 3:35 pm

btw the papers cited:

"“Real Estate Betas and the Implications for Asset Allocation" by Peter Mladina in the Spring 2018 issue of The Journal of Investing.
https://www.northerntrust.com/documents ... c=25418665

“Are REITs a Distinct Asset Class?” by Jared Kizer (associated with Buckingham/BAM like Larry Swedroe) and Sean Grover.
https://papers.ssrn.com/sol3/papers.cfm ... id=2965146

The first paper covers more than just public equity REITs, for those who are making the (important) distinction between more direct real estate investing and REITs. Then again, I don't think these overlap much with the kinds of real estate investing that small investors do, mostly in small residential properties and the likes.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by jalbert » Mon Apr 30, 2018 4:49 pm

The Fama French 5 factor model explains REIT returns very well. REITs behave like a portfolio comprised of 60% small value equity and 40% high yield long term bonds. 
Not in the last 10 years:

https://www.portfoliovisualizer.com/bac ... tion3_2=60

Comments that 10 years is too short of a timeframe should be accompanied with a definition of "behave like".
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by ThrustVectoring » Mon Apr 30, 2018 5:39 pm

KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
Real estate is definitely special, but it's the mortgage that matters, not the property. There's no better way to short long-term bonds, and long-term bonds are pretty terrible so it's a fantastic short.
Current portfolio: 60% VTI / 40% VXUS

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by golfCaddy » Mon Apr 30, 2018 6:08 pm

Random Walker wrote:
Mon Apr 30, 2018 8:37 am
http://www.etf.com/sections/index-inves ... nopaging=1
But studies have shown that the returns of REITs are explained underlying factors.

Dave
The data in Larry's post do not support this conclusion. From the Mladina paper:
The r-squared value was 0.67.
. From the Kizer and Grover paper:
While the r-squared value was relatively low for REITs (0.51), this was also true for other industries they examined, including energy, utilities and health care.
A r^2 from 0.51 to 0.67 represents a poor fit, indicating that factors do not explain REIT returns. If the R^2 is low for other industries, all that demonstrates is factors don't do a good job of explaining the returns of those industries either.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by nedsaid » Tue May 01, 2018 4:38 pm

Random Walker wrote:
Mon Apr 30, 2018 11:18 am
KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
I don’t think this is just a nitpick. I think it’s a major league concern. The stocks of commodity producers I believe behave more like stocks than commodities. REITs behave to a big extent as SV equities. When something gets “financialized”, it’s uniqueness seems to evaporate. As I’ve evolved into a major league factor and alt investor, this is a bit of a nagging concern for me. Of course my concern is greatest for the behavioral anomalies. Risk based sources of return should rationally persist. I do believe though that human behavior is tenaciously persistent, there are limits to arbitrage, and the data is so good, that I’ve invested in TS and CS Momentum as well. But the “finamcialization” issue always concerns me: William Bernstein’s Skating Where The Puck Was.

Dave
The question that has to be asked is if factors will be financialized as well. I can see why some folks have thrown in the towel and gone to the Taylor Larimore Three Fund Portfolio. Markets do change over time.
A fool and his money are good for business.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by nedsaid » Tue May 01, 2018 4:51 pm

Sometimes I think we can overthink things and Larry's article might be a good example of that. I bought REIT funds when they came available because it just seemed to make sense to me. When I learned that REITs had a bit higher returns than the S&P 500 with low correlation, that reinforced my original decision.

I sense that investment experts are getting disenchanted with REITs for various reasons and now the debunking articles are coming out. There gets to be a point where if an investment does what I want that I am satisfied no matter what the experts say. Experts got disenchanted because REITs went from cheap to expensive. They are trending back towards Value but aren't there yet. The thing is, almost all asset classes go through this relatively cheap to expensive to relatively cheap again.

Larry could write a similar article that says, "Well, you know, stocks aren't really all that special either." Pretty much, we could get to the point where all we are investing in are the factors not caring about what the actual underlying assets are. I think this is flawed reasoning. There are specific reasons that I own stocks, specific reasons I own bonds, and specific reasons that I own REITs. The actual businesses underlying all of this are pretty darned important and we are losing sight of this.
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by grok87 » Tue May 01, 2018 5:01 pm

I read the article. Both papers seem carefully done. But there is something missing from research best practice i think- in sample vs out of sample.

The idea is to divide your period into two halves. Do your regression on the first half (in sample). Then see if what you come up with holds for the second half.

Most investment research fails this simple test. Investing is not physics. The relationships and correlations are not static. A lot of the relationships purported to be found are period dependent.

As the Talmud says (and quoted by David swensen’s) divide your investments into stocks, bonds, and real estate.

Yes reits are not a perfect proxy for real estate. But better than nothing.

I think the conclusion of both papers that real estate is a hybrid asset with equity and bond features is not new. Swensen makes that point as well.

Cheers,
Grok
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by grok87 » Tue May 01, 2018 5:03 pm

ThrustVectoring wrote:
Mon Apr 30, 2018 5:39 pm
KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
Real estate is definitely special, but it's the mortgage that matters, not the property. There's no better way to short long-term bonds, and long-term bonds are pretty terrible so it's a fantastic short.
Interesting observation.
Keep calm and Boglehead on. KCBO.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by stlutz » Tue May 01, 2018 7:09 pm

I read the article. Both papers seem carefully done. But there is something missing from research best practice i think- in sample vs out of sample.

The idea is to divide your period into two halves. Do your regression on the first half (in sample). Then see if what you come up with holds for the second half.
+1. If I look at the "rolling regrssion" tab on Portfolio Visualizer, the factor weightings for the VG REIT fund vary quite a bit across time. Not in a wild way that suggests no correlation, but in a way where you can't really make a good forecast of exactly what weighting of other assets = REITs.

https://www.portfoliovisualizer.com/fac ... sion=false

If the definition of "special" is that there is no way to put together a combination of other assets that would have perfomed about the same as asset X over a period of time, then almost no investment is "special". On the other hand, if "special" means than you can't know ahead of time what combination of other assets will perform about the same as assets X, then REITs actually do seem more "special".

One other note: Correlations are relative. If REITs are not special, then the opposite holds as well--there is nothing special about a holding a portfolio of smallcap value stocks and bonds.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by grok87 » Tue May 01, 2018 8:08 pm

stlutz wrote:
Tue May 01, 2018 7:09 pm
I read the article. Both papers seem carefully done. But there is something missing from research best practice i think- in sample vs out of sample.

The idea is to divide your period into two halves. Do your regression on the first half (in sample). Then see if what you come up with holds for the second half.
+1. If I look at the "rolling regrssion" tab on Portfolio Visualizer, the factor weightings for the VG REIT fund vary quite a bit across time. Not in a wild way that suggests no correlation, but in a way where you can't really make a good forecast of exactly what weighting of other assets = REITs.

https://www.portfoliovisualizer.com/fac ... sion=false

If the definition of "special" is that there is no way to put together a combination of other assets that would have perfomed about the same as asset X over a period of time, then almost no investment is "special". On the other hand, if "special" means than you can't know ahead of time what combination of other assets will perform about the same as assets X, then REITs actually do seem more "special".

One other note: Correlations are relative. If REITs are not special, then the opposite holds as well--there is nothing special about a holding a portfolio of smallcap value stocks and bonds.
thanks.
i tried looking at the in-sample, out-of-sample idea with the tool. but unfortunately the fixed income factors only start in 2010.
Keep calm and Boglehead on. KCBO.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by lazyday » Wed May 02, 2018 5:21 am

stlutz wrote:
Tue May 01, 2018 7:09 pm
, the factor weightings for the VG REIT fund vary quite a bit across time. Not in a wild way that suggests no correlation, but in a way where you can't really make a good forecast of exactly what weighting of other assets = REITs. .... if "special" means than you can't know ahead of time what combination of other assets will perform about the same as assets X, then REITs actually do seem more "special".
Seems like an interesting argument. But is this more true for the REIT sector than it is for other sectors?

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by lack_ey » Wed May 02, 2018 11:15 am

grok87 wrote:
Tue May 01, 2018 5:01 pm
I read the article. Both papers seem carefully done. But there is something missing from research best practice i think- in sample vs out of sample.

The idea is to divide your period into two halves. Do your regression on the first half (in sample). Then see if what you come up with holds for the second half.
With that kind of division, I'd think that we would say that both halves are in sample. This is just a kind of test of robustness of the result and consistency over time.

And by the way, go back and check the second paper (Kizer/Grover), pg. 14-15, and exhibits 10-15. They do look at subsets of the full series, just not chunked in half. There's pre-2007 to make sure it's not the financial crisis driving results, then post-May 1996 to make sure it's not old results prior to wider popularity of REITs (and REIT index funds) that is driving results.

lazyday wrote:
Wed May 02, 2018 5:21 am
stlutz wrote:
Tue May 01, 2018 7:09 pm
, the factor weightings for the VG REIT fund vary quite a bit across time. Not in a wild way that suggests no correlation, but in a way where you can't really make a good forecast of exactly what weighting of other assets = REITs. .... if "special" means than you can't know ahead of time what combination of other assets will perform about the same as assets X, then REITs actually do seem more "special".
Seems like an interesting argument. But is this more true for the REIT sector than it is for other sectors?
More than the average sector, I think, but not necessarily uniquely so.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by GAAP » Wed May 02, 2018 11:37 am

nedsaid wrote:
Tue May 01, 2018 4:51 pm
The thing is, almost all asset classes go through this relatively cheap to expensive to relatively cheap again.

...

There are specific reasons that I own stocks, specific reasons I own bonds, and specific reasons that I own REITs. The actual businesses underlying all of this are pretty darned important and we are losing sight of this.
Can you think of any asset classes that don't go through this process? This is the reason for diversification -- and not an argument either for against a particular asset class.

My specific reasoning:

Real Estate is a separate asset class from stocks, bonds, etc. Since it reacts to economic events, changes in the capital markets, interest rates, inflation, etc., it will behave to a degree like a traditional stock/bond mix -- this should not be surprising. The fact that it can be securitized into REITs makes it a reasonable potential choice for investment -- and yes, indirectly a small portion of the stock market.

REITs are not a perfect inflation hedge, they don't give returns without risk, nor do they have special immunity from economic events. However, I'm convinced that REITs have sufficiently imperfect correlation with stocks and bonds and sufficiently high returns to justify inclusion in my portfolio. They are sufficiently simple enough to understand that I don't worry about unnecessary complexity.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by nedsaid » Wed May 02, 2018 11:56 am

GAAP wrote:
Wed May 02, 2018 11:37 am
nedsaid wrote:
Tue May 01, 2018 4:51 pm
The thing is, almost all asset classes go through this relatively cheap to expensive to relatively cheap again.

...

There are specific reasons that I own stocks, specific reasons I own bonds, and specific reasons that I own REITs. The actual businesses underlying all of this are pretty darned important and we are losing sight of this.
Can you think of any asset classes that don't go through this process? This is the reason for diversification -- and not an argument either for against a particular asset class.

My specific reasoning:

Real Estate is a separate asset class from stocks, bonds, etc. Since it reacts to economic events, changes in the capital markets, interest rates, inflation, etc., it will behave to a degree like a traditional stock/bond mix -- this should not be surprising. The fact that it can be securitized into REITs makes it a reasonable potential choice for investment -- and yes, indirectly a small portion of the stock market.

REITs are not a perfect inflation hedge, they don't give returns without risk, nor do they have special immunity from economic events. However, I'm convinced that REITs have sufficiently imperfect correlation with stocks and bonds and sufficiently high returns to justify inclusion in my portfolio. They are sufficiently simple enough to understand that I don't worry about unnecessary complexity.
Factors and the underlying academic research to a good job of telling us what type of securities within broad asset classes tend to outperform the market and why. Or at least why such securities outperformed in the past. The research has value.

Factor investing seems to be slowly morphing from a long only strategy to a leveraged strategy that utilizes shorting. This involves more complexity and higher expense ratios. These Factor funds are relatively new, AQR seems to be what Swedroe and a few Bogleheads prefer. These new products are relatively untested.

I am all in with factors and trying to squeeze out a bit more performance. Factor investing also provides another element of diversification. What I am seeing is discussions of probability and statistics and wiggles and squiggles on a graph. My concern is that we seem to be forgetting that we are really investing in US and International businesses and economies through the equity and credit markets. It seems like a battle of the quants now. Quantitative analysis has its value but it can only analyze the past and project forward.

The thing is, Larry could write an article about any asset class and say there is nothing special about it. Almost anything can be debunked. I am just saying is keep all this in perspective.
A fool and his money are good for business.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Engineer250 » Wed May 02, 2018 12:06 pm

9-5 Suited wrote:
Mon Apr 30, 2018 9:06 am
My 5% allocation to VNQ has been the one aspect of my AA I'm least confident in and go back and forth on somewhat often. And my feelings on it are not correlated with the current performance, just a general skepticism that low correlations are a good enough reason to own a sector (since most individual sectors will not be perfectly correlated with the market).

This article is presented in a highly thoughtful way consistent with most everything Larry does, and the part at the end about the replica SV/LTB portfolio was especially interesting. I'll be adding it to my bank of information to consider if at any point in the future I opt to make some updates to my IPS and AA. For now, staying the course.

Thanks for sharing!!
I held between 5 and 10% for a while and like you went back and forth. Anytime I thought of getting rid of it, it seemed like “giving up” when of course sticking to an AA can be more important than what the AA is sometimes. However, earlier this year I decided I didn’t want the complication any more and got out of it. I feel a lot happier.

As soon as the TSP fixes their I Fund I will be able to go back to a genuine 3-Fund in all my accounts (holding emerging and international small cap now). For myself I think I made the right decision. But I also know others might prefer a more complicated portfolio and see benefits from holding REIT.
Where the tides of fortune take us, no man can know.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by GAAP » Wed May 02, 2018 12:10 pm

nedsaid wrote:
Wed May 02, 2018 11:56 am
I am all in with factors and trying to squeeze out a bit more performance. Factor investing also provides another element of diversification. What I am seeing is discussions of probability and statistics and wiggles and squiggles on a graph. My concern is that we seem to be forgetting that we are really investing in US and International businesses and economies through the equity and credit markets. It seems like a battle of the quants now. Quantitative analysis has its value but it can only analyze the past and project forward.

The thing is, Larry could write an article about any asset class and say there is nothing special about it. Almost anything can be debunked. I am just saying is keep all this in perspective.
I actually agree with you. I don't fit in Larry's "Many investors" because I don't use "relatively low correlation" as a reason to define an asset class. I have zip, zero, nada trust in those "wiggles and squiggles" -- too many years of seeing non-financial systems not respond like the graphs would suggest.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by LarryAllen » Wed May 02, 2018 12:14 pm

KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
That's what I was thinking. I'll keep owning my actual real estate... diversified by asset class and geography.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by vencat » Wed May 02, 2018 1:24 pm

Larry has changed his mind on REITs:
This from the Morningstar Boglehead site in reply to Jeff Troutner . Dated, yes.
few thoughts02-13-2003, 5:18 PM | Post #1404819I have serious problems with the article
first -re tax loss harvesting clearly gives you present value and any gain/loss as you swap back and forth for a 30 day period between similar funds over time should be totally random---hence a free lunch, except if you care (and I don't) about random tracking error
Second, I disagree with the article on REITS--REITS certainly are like value stocks in that they have high leverage and high operating income volatility--thus in recessions/deflations and flights to quality they are likely to act like value stocks---but not perfectly like them.They do not have perfect correlation and there are times when RE will dramatically outperform value stocks and vice versus.
The risk of REITs is certainly reflected in the prices of the stocks and expected returns. The companies are not as distressed thus the expected return is not as high as SV--but they are also less risky---a point that seems to be lost in the article
Third, as someone pointed out the nature of the industry changed dramatically in last ten years with large public companies not small little ones taking over control of the assets---
The bottom line is that REITs are an excellent diversifier, and are dramatically underweighted in TSM, and for those wanted to hold market like portfolios they should consider adding significant slice of REITS to the portfolio---Someone like John especially should be considering it given his views on market like holdings
Finally I found it more than somewhat amusing that the article "bashes" TLH when DFA funds funds whose main strategy for improving AT returns is TLH----and accepts the random drift that goes with it

Originally posted in thread: 2589

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Angst » Wed May 02, 2018 3:03 pm

Ah, to stroll down Memory Lane once again, where the self-evident convictions of youth reside...

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Alexa9 » Wed May 02, 2018 3:10 pm

Note that TSM has REITs already. I see no reason to overweight them personally just like any other sector.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by 9-5 Suited » Tue May 08, 2018 12:44 pm

Engineer250 wrote:
Wed May 02, 2018 12:06 pm
I held between 5 and 10% for a while and like you went back and forth. Anytime I thought of getting rid of it, it seemed like “giving up” when of course sticking to an AA can be more important than what the AA is sometimes. However, earlier this year I decided I didn’t want the complication any more and got out of it. I feel a lot happier.

As soon as the TSP fixes their I Fund I will be able to go back to a genuine 3-Fund in all my accounts (holding emerging and international small cap now). For myself I think I made the right decision. But I also know others might prefer a more complicated portfolio and see benefits from holding REIT.
Thanks for sharing your experience with the same dilemma - appreciate the perspective! I'm leaning that way as well, but will give it another year or so to make sure I still feel the same.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by azanon » Tue May 08, 2018 2:03 pm

FWIW, I'm not buying the notion that factors are now the be-all, end-all, and that the only relevance of various stock market sectors is the extent to which they express the various identified factors. Someone needs to make a call in to CNBC, Wall Street Journal, etc. and tell them that they're wasting their time talking about stock market sectors. This is going to be really bad news too for Personal Capital since that's how they asset allocate.

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Interesting read on REITs by Swedroe

Post by ChinchillaWhiplash » Fri May 18, 2018 1:45 pm

[Thread merged into here, see below. --admin LadyGeek]

Here is an interesting paper on the role of REITs in a diversified portfolio which questions the validity of considering REITs as a separate asset class. Sorry if this has been posted previously, but didn't find it when searching. https://www.advisorperspectives.com/art ... -portfolio

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Re: Interesting read on REITs by Swedroe

Post by lack_ey » Fri May 18, 2018 2:38 pm

Okay, so this is older and overlaps with a more recent article but is unique and not the same.

Here's a prior discussion of a 2018 article on the same topic and author:
viewtopic.php?t=248350

I'm not particularly enamored of the idea of considering something an asset class based on performance similarity and correlations but I think the main points are fine.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by LadyGeek » Fri May 18, 2018 2:57 pm

^^^ I merged ChinchillaWhiplash's thread into here, which is a similar discussion.
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by staythecourse » Fri May 18, 2018 6:43 pm

Engineer250 wrote:
Wed May 02, 2018 12:06 pm
9-5 Suited wrote:
Mon Apr 30, 2018 9:06 am
My 5% allocation to VNQ has been the one aspect of my AA I'm least confident in and go back and forth on somewhat often. And my feelings on it are not correlated with the current performance, just a general skepticism that low correlations are a good enough reason to own a sector (since most individual sectors will not be perfectly correlated with the market).

This article is presented in a highly thoughtful way consistent with most everything Larry does, and the part at the end about the replica SV/LTB portfolio was especially interesting. I'll be adding it to my bank of information to consider if at any point in the future I opt to make some updates to my IPS and AA. For now, staying the course.

Thanks for sharing!!
I held between 5 and 10% for a while and like you went back and forth. Anytime I thought of getting rid of it, it seemed like “giving up” when of course sticking to an AA can be more important than what the AA is sometimes. However, earlier this year I decided I didn’t want the complication any more and got out of it. I feel a lot happier.

As soon as the TSP fixes their I Fund I will be able to go back to a genuine 3-Fund in all my accounts (holding emerging and international small cap now). For myself I think I made the right decision. But I also know others might prefer a more complicated portfolio and see benefits from holding REIT.
Just curious why no one ever has a doubt on an asset class when it is up 10%? My advice to all is do NOT make any changes to one's asset allocation when the asset class is down. Rationalization is a POWERFUL defense mechanism when it seems comes to investing. It goes something like this... Asset class A is down and articles are written about how useless it is. Investor B reads the article and goes, "Yes that makes sense so I'll drop the asset class A" and proceeds to drop it. In the end, all you did was rationalize dropping something that was doing poorly and NOT call it market timing. This is why all the back tracking interactive tools minimize and that is the ability to stay the course DESPITE all the noise no matter where it is coming from.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Mydanyale » Fri May 18, 2018 8:34 pm

columbia wrote:
Mon Apr 30, 2018 3:26 pm
I think the only special accumulation-stage (non cash) investment is TIAA Traditional. If folks have access to one of the flavors, they should probably use that and stop chasing the dragon with other far less tangible and reliable alternative investment options.
I believe it is only available for retirement accounts with them. Is that right?

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by grok87 » Fri May 18, 2018 9:27 pm

staythecourse wrote:
Fri May 18, 2018 6:43 pm
Engineer250 wrote:
Wed May 02, 2018 12:06 pm
9-5 Suited wrote:
Mon Apr 30, 2018 9:06 am
My 5% allocation to VNQ has been the one aspect of my AA I'm least confident in and go back and forth on somewhat often. And my feelings on it are not correlated with the current performance, just a general skepticism that low correlations are a good enough reason to own a sector (since most individual sectors will not be perfectly correlated with the market).

This article is presented in a highly thoughtful way consistent with most everything Larry does, and the part at the end about the replica SV/LTB portfolio was especially interesting. I'll be adding it to my bank of information to consider if at any point in the future I opt to make some updates to my IPS and AA. For now, staying the course.

Thanks for sharing!!
I held between 5 and 10% for a while and like you went back and forth. Anytime I thought of getting rid of it, it seemed like “giving up” when of course sticking to an AA can be more important than what the AA is sometimes. However, earlier this year I decided I didn’t want the complication any more and got out of it. I feel a lot happier.

As soon as the TSP fixes their I Fund I will be able to go back to a genuine 3-Fund in all my accounts (holding emerging and international small cap now). For myself I think I made the right decision. But I also know others might prefer a more complicated portfolio and see benefits from holding REIT.
Just curious why no one ever has a doubt on an asset class when it is up 10%? My advice to all is do NOT make any changes to one's asset allocation when the asset class is down. Rationalization is a POWERFUL defense mechanism when it seems comes to investing. It goes something like this... Asset class A is down and articles are written about how useless it is. Investor B reads the article and goes, "Yes that makes sense so I'll drop the asset class A" and proceeds to drop it. In the end, all you did was rationalize dropping something that was doing poorly and NOT call it market timing. This is why all the back tracking interactive tools minimize and that is the ability to stay the course DESPITE all the noise no matter where it is coming from.

Good luck.
nicely put.
that's another advantage of investing in transparent publicly traded markets, as David Swensen recommends in Unconventional Success instead of gimmicky quant type funds.

Here's a quote from a recent interview
https://www.cfr.org/event/conversation-david-swensen
wrote: SWENSEN: You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.

And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest.
keep calm and REIT on.
Keep calm and Boglehead on. KCBO.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by Engineer250 » Sat May 19, 2018 5:35 am

staythecourse wrote:
Fri May 18, 2018 6:43 pm
Just curious why no one ever has a doubt on an asset class when it is up 10%? My advice to all is do NOT make any changes to one's asset allocation when the asset class is down. Rationalization is a POWERFUL defense mechanism when it seems comes to investing. It goes something like this... Asset class A is down and articles are written about how useless it is. Investor B reads the article and goes, "Yes that makes sense so I'll drop the asset class A" and proceeds to drop it. In the end, all you did was rationalize dropping something that was doing poorly and NOT call it market timing. This is why all the back tracking interactive tools minimize and that is the ability to stay the course DESPITE all the noise no matter where it is coming from.

Good luck.
Dollar-wise my REIT was positive from when I bought it, though largely very flat. However, what you describe is why I held off for so long. Concerned that if I sold while it was flat that would look exactly like market timing. But hanging onto an alternative/commodity when you want to simplify your portfolio isn't a good answer either. Waiting for REIT to go up before I sell would also be market timing. So I just pulled the band-aid off and did it. I am happy I did.
Where the tides of fortune take us, no man can know.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by grabiner » Sun May 20, 2018 11:01 am

golfCaddy wrote:
Mon Apr 30, 2018 6:08 pm
Random Walker wrote:
Mon Apr 30, 2018 8:37 am
http://www.etf.com/sections/index-inves ... nopaging=1
But studies have shown that the returns of REITs are explained underlying factors.

Dave
The data in Larry's post do not support this conclusion. From the Mladina paper:
The r-squared value was 0.67.
. From the Kizer and Grover paper:
While the r-squared value was relatively low for REITs (0.51), this was also true for other industries they examined, including energy, utilities and health care.
A r^2 from 0.51 to 0.67 represents a poor fit, indicating that factors do not explain REIT returns. If the R^2 is low for other industries, all that demonstrates is factors don't do a good job of explaining the returns of those industries either.
So what this says is that every sector has its own unique risk. Energy stocks are stocks, so they have the characteristics of stocks (including market exposure, value exposure, etc.) but then the specific characteristics of the energy industry.

The case for overweighting real estate as a stock class in an efficient market is that the real estate sector is a smaller part of the stock market than of the overall investment market. If you overweight REITs, you own more publicly traded and less privately traded real estate than the average investor.
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by CurlyDave » Mon May 21, 2018 12:53 pm

ThrustVectoring wrote:
Mon Apr 30, 2018 5:39 pm
KyleAAA wrote:
Mon Apr 30, 2018 10:56 am
A nitpick: REITs are not real estate. Real Estate may very well be special, we don't know.
Real estate is definitely special, but it's the mortgage that matters, not the property. There's no better way to short long-term bonds, and long-term bonds are pretty terrible so it's a fantastic short.
+1

It always amazes me that people on this forum, dedicated to low-fee, DIY investing can put REITs in the same category as brick and mortar real estate.

A REIT has layer after layer of management expenses, with a multitude of ways to obfuscate and hide just how much the investor pays for this "management expertise". Very analogous to actively managed funds.

When I buy a property for myself, I know exactly how much the manager makes. And when something needs to be repaired, I do it myself, or hire a handyman directly, eliminating all kinds of overhead and inefficiency.

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by vineviz » Mon May 21, 2018 5:13 pm

Random Walker wrote:
Mon Apr 30, 2018 8:37 am

There is likely more efficient and direct ways to access these factors than REITs, and better options available as true diversifiers.
This is definitely true. REITs are a stock sector and not an asset class. If a portfolio has a balanced set of investment exposures (e.g. an efficient blend of large and small stocks, value and growth stocks, domestic and foreign stocks) then adding REITs generally will not further diversify the portfolio and may further concentrate it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: Real Estate Isn’t Special

Post by knpstr » Mon May 21, 2018 5:33 pm

Sensationalized headline from Larry.

More accurately it should read: "REITs aren't special" based on a quick skim of his article.
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by grabiner » Mon May 21, 2018 11:27 pm

CurlyDave wrote:
Mon May 21, 2018 12:53 pm
It always amazes me that people on this forum, dedicated to low-fee, DIY investing can put REITs in the same category as brick and mortar real estate.

A REIT has layer after layer of management expenses, with a multitude of ways to obfuscate and hide just how much the investor pays for this "management expertise". Very analogous to actively managed funds.
REITs, like other businesses, are valued by stock investors based on the returns they will earn for the investor. If a corporation has a lot of expenses before it pays out its profits, the stock will be worth less.

Thus a better analogy is closed-end funds, rather than actively managed funds; closed-end funds usually trade at a discount to net asset value.
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Re: Larry Swedroe: Real Estate Isn’t Special

Post by WanderingDoc » Tue May 22, 2018 12:19 am

Investing in REITs is NOT investing in real estate, by any sense of the word. I have listed and detailed the 8-10 differences between the two many times on here so I won't repeat. Briefly: You don't get the benefits of direct ownership, ability to choose your own market and submarket, choose your exit strategies, buy below retail value, financing, creative financing, tax benefits, cash out refi pulling out most or all of your capital, etc. The list goes on. An annualized return of less than 35% on a leveraged direct real estate investment is disappointing. REIT returns are a joke. And you have no control. You can take that to the bank! I would (and I do) hold cash in a 1% interest bank account before purchasing a REIT.

Random Walker wrote:
Mon Apr 30, 2018 8:37 am
http://www.etf.com/sections/index-inves ... nopaging=1

Many of us consider REITs a unique asset class, and an excellent portfolio diversifier. But studies have shown that the returns of REITs are explained underlying factors. The Fama French 5 factor model explains REIT returns very well. REITs behave like a portfolio comprised of 60% small value equity and 40% high yield long term bonds. The conclusion of the first paper reviewed by Larry is that “if one were taking a factor based approach to asset allocation, then real estate would not be considered a separate source of return”.
There is likely more efficient and direct ways to access these factors than REITs, and better options available as true diversifiers.

Dave
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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