is real estate dead as a diversifier?

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prk
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is real estate dead as a diversifier?

Post by prk » Tue Sep 10, 2019 11:18 am

I have seen many posts suggesting that RE is no longer a good diversifier. true?

ohai
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Re: is real estate dead as a diversifier?

Post by ohai » Tue Sep 10, 2019 11:27 am

Diversify against what?

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nedsaid
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Re: is real estate dead as a diversifier?

Post by nedsaid » Tue Sep 10, 2019 11:28 am

I am less enthusiastic about Real Estate Investment Trusts (REITs) than before. A big reason for this is valuation. With very low interest rates in the aftermath of the 2008-2009 financial crisis, investors piled into anything that had extra yield; such things as REITs, Higher Dividend Stocks, High Yield Bonds, etc. This made many such investments expensive relative to the stock market itself. REITs historically have had 6% to 8% yields, they got all the way down to 3.1%. The yield on Vanguard REIT index Admiral shares is now 3.83%.

I have retained my REITs after cutting back on them by 20% about 3 years ago. Keeping what I have but not buying more. REITs have also been doing well lately. I think they still offer diversification benefits to an investor but I wouldn't tell people to pile into them right now.
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Re: is real estate dead as a diversifier?

Post by nedsaid » Tue Sep 10, 2019 11:28 am

ohai wrote:
Tue Sep 10, 2019 11:27 am
Diversify against what?
Inflation.
A fool and his money are good for business.

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Re: is real estate dead as a diversifier?

Post by LilyFleur » Tue Sep 10, 2019 11:30 am

I live in a VHCOL area. My condo is 25% of my net worth. I cannot afford rentals in this area. I think REITs wouldn't be a great idea for me as the dividends are taxable as ordinary income.

I think it depends on your situation and what you like to do in your spare time. The topic has been rigorously debated on this forum.

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Re: is real estate dead as a diversifier?

Post by Ice-9 » Tue Sep 10, 2019 11:32 am

Assuming you mean is it a good diversifier against US Stocks, I don't see why not. A home value logically shouldn't vary with the value of the stock market.

If you're asking specifically about REIT index funds, the Portfolio Visualizer website lists a 0.58 US Market correlation for VGSIX, which seems like a decent diversification benefit to me. Someone will likely point out that the stocks in the REIT index are included in smaller ratios in total stock market index.

See this comparison since 1985

If we shorten the time period by 20 years, the US Market correlation does increase. But it's certainly not dead, and that is a small sample period.
Last edited by Ice-9 on Tue Sep 10, 2019 11:33 am, edited 1 time in total.

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Re: is real estate dead as a diversifier?

Post by Forester » Tue Sep 10, 2019 11:33 am

How about global REITs?

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Re: is real estate dead as a diversifier?

Post by alex_686 » Tue Sep 10, 2019 11:58 am

Maybe. I personally overweight based on my readings, but it is debatable. Correlations have increased over the past 20 years. From what I have read, publicly traded REITs equally driven by the underlying real estate market and the stock market.

This may be because people have realized that REITs are a diversifer, so more money flows into and out of the publicly traded REIT sector like other sectors. Hence, acting more and more like ordinary equities.

This may also be because the past 10 years have been very stable - decent balanced growth, low inflation, and low interest rates. In this calm period all asset classes are going to have higher correlations with each other. REITs will only show their diversification benefits when the market undergoes stress.
Forester wrote:
Tue Sep 10, 2019 11:33 am
How about global REITs?
No, I would think not. The reason that US REITs are considered a distinct asset class is that there is a host of tax rules and regulations surrounding their operations. This keeps them distinctly different then other equity classes. Some global jurisdictions follow a similar tax treatment like the US, others don't. So a nuanced questions becomes much more nuanced.

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Re: is real estate dead as a diversifier?

Post by KyleAAA » Tue Sep 10, 2019 12:16 pm

Assuming you mean REITs, no. Correlations with the total market were quite high in the runup to and aftermath of the financial crisis, but were relatively low both before and after. The correlation has been creeping up the last few years, but it still stands below 0.6. It has worked okay as a diversifier.

https://www.portfoliovisualizer.com/ass ... &months=36

Assuming you mean physical real estate rather than REITs, doubly no.

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Re: is real estate dead as a diversifier?

Post by Svensk Anga » Tue Sep 10, 2019 12:25 pm

nedsaid wrote:
Tue Sep 10, 2019 11:28 am
The yield on Vanguard REIT index Admiral shares is now 3.83%.
This yield looked high from what I have seen lately, so I went to Vanguard to check it out. Their web page for this fund (https://investor.vanguard.com/mutual-fu ... file/vgslx ) shows the current unadjusted effective yield as 3.07% (click on the link marked "note" next to SEC yield on the linked page.) The adjusted yield is only 2.26%. Some of the difference is return of capital, so not all of the 3.07% is truly return on investment. That's pretty dismal for an asset that has to distribute almost all of its earnings and so cannot re-invest for growth like a regular corporation, but still has equity-like risk.

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Re: is real estate dead as a diversifier?

Post by Phineas J. Whoopee » Tue Sep 10, 2019 12:41 pm

Are there any REITs that invest only in gold mines? Based on recent threads they would seem to be the perfect diversifier. :wink:
PJW

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Re: is real estate dead as a diversifier?

Post by nedsaid » Tue Sep 10, 2019 1:17 pm

Svensk Anga wrote:
Tue Sep 10, 2019 12:25 pm
nedsaid wrote:
Tue Sep 10, 2019 11:28 am
The yield on Vanguard REIT index Admiral shares is now 3.83%.
This yield looked high from what I have seen lately, so I went to Vanguard to check it out. Their web page for this fund (https://investor.vanguard.com/mutual-fu ... file/vgslx ) shows the current unadjusted effective yield as 3.07% (click on the link marked "note" next to SEC yield on the linked page.) The adjusted yield is only 2.26%. Some of the difference is return of capital, so not all of the 3.07% is truly return on investment. That's pretty dismal for an asset that has to distribute almost all of its earnings and so cannot re-invest for growth like a regular corporation, but still has equity-like risk.
I remember that Larry Swedroe posted that to calculate future expected real returns from REITs, you take the yield and subtract 2.9%. As I recall, this takes into account return of capital. It appears that whatever yield you use here in the calculation that future expected returns from REITs are very skimpy indeed. There is also a calculation where you compare REIT prices to underlying property values, someone recently posted it was something like 105%, in other words, REITs are about 5% more expensive than the underlying properties.

You have outlined the reasons that my enthusiasm for REITs is much less than before.
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Re: is real estate dead as a diversifier?

Post by nedsaid » Tue Sep 10, 2019 1:34 pm

Foggy memory here but I recall that Larry Swedroe said that the academics could explain REIT returns with a factor based explanation: Size, Value, and Term. It seemed that they could recreate REIT returns with Small Value and long term Corporate Bonds. Please correct me if I missed something. But pretty much, the academics say there is nothing special about REITs. I have chosen to keep mine.
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Re: is real estate dead as a diversifier?

Post by CurlyDave » Tue Sep 10, 2019 1:35 pm

KyleAAA wrote:
Tue Sep 10, 2019 12:16 pm

...Assuming you mean physical real estate rather than REITs, doubly no.
I have lots of physical real estate and consider it a good diversifier. I do not like REITs.

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Re: is real estate dead as a diversifier?

Post by ohai » Tue Sep 10, 2019 2:20 pm

nedsaid wrote:
Tue Sep 10, 2019 11:28 am
ohai wrote:
Tue Sep 10, 2019 11:27 am
Diversify against what?
Inflation.
You hedge against inflation! You diversify against other investments, like stocks or something.

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Re: is real estate dead as a diversifier?

Post by ThrustVectoring » Tue Sep 10, 2019 2:48 pm

Real estate is pretty complicated for a variety of reasons.

First of all, housing prices are based off the net present value of future rents. As such, they behave like bonds to some extent - as interest rates fall, houses become more valuable because the value of a month's rent thirty years hence has gone up. On the other side, housing purchases are often financed with long-term fixed rate mortgages (at least in the US), which are effectively short bonds. There's an embedded call option to pay off the mortgage at par, too, which further complicates the analysis. Overall, though, the typical position is roughly long real interest rates, somewhat offset with a short nominal position, and hedged with a nominal call option. This is much more complex than most homeowners expect, and almost certainly not a position entered with the intent to make plays on future interest rate movements.

Second, housing prices are an extremely local phenomenon, which makes them unusually poor investments for many working employees. Rents are based off prevailing wages, and if your local area has an economic downturn, this will reflect in housing prices. Detroit in 2007 is a big example of this - the auto industry ran into issues, so there was simultaneously a bunch of downsizing and a collapse in housing prices. If you worked for an automaker or one of their suppliers and owned your own home, you were not in a great position if you decided that you needed to move for better work opportunities.

Third, paid-off houses are a great retirement investment from a cash-flow perspective. After setting aside operating expenses and reserves for maintenance and vacancies, you can spend the entire free cash flow from a rental property. The price-to-spending ratio for a stock and bond portfolio is typically in excess of 25 (using the 4% rule). The median price-to-rent ratio is something like 18 or 19. This is significantly more capital-efficient for turning financial assets into a sustainable income stream, although the idiosyncratic risk is a more than fair offset for that.

Overall, my opinion is that directly held real estate can work very well for investment purposes, but is by no means the obviously-best course of action.
Current portfolio: 60% VTI / 40% VXUS

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Re: is real estate dead as a diversifier?

Post by nedsaid » Tue Sep 10, 2019 3:01 pm

ohai wrote:
Tue Sep 10, 2019 2:20 pm
nedsaid wrote:
Tue Sep 10, 2019 11:28 am
ohai wrote:
Tue Sep 10, 2019 11:27 am
Diversify against what?
Inflation.
You hedge against inflation! You diversify against other investments, like stocks or something.
I am diversifying against certain risks that face an investor. To me, public enemy number one is the corrosive effect of inflation upon the purchasing power of the Dollar. Such things as REITs and TIPS are part of my arsenal against inflation as are stocks themselves. If we get an inflation spike, this is hard on both stocks and bonds, it can take both years to get you your inflation adjustment. REITs should fare better than stocks in an inflation spike and TIPS better than nominal bonds.

There is the issue of correlation between asset classes, historically REITs have had similar returns to stocks, often with low correlation to stocks. But correlations between asset classes do vary over time so this diversification benefit is not guaranteed. Also, correlations between asset classes tend to rise in a crisis. During the 2008-2009 financial crisis, only nominal Treasuries and certain Agency Bonds like GNMAs zigged while other asset classes zagged. Pretty much everything else fell in price.
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Re: is real estate dead as a diversifier?

Post by ohai » Tue Sep 10, 2019 4:19 pm

Pretty convoluted explanation to try to explain away wrong use of terminology...

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Re: is real estate dead as a diversifier?

Post by DaftInvestor » Tue Sep 10, 2019 4:23 pm

I personally never considered real estate to be alive as a diversifier to begin with.

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Re: is real estate dead as a diversifier?

Post by Sandtrap » Tue Sep 10, 2019 6:02 pm

prk wrote:
Tue Sep 10, 2019 11:18 am
I have seen many posts suggesting that RE is no longer a good diversifier. true?
Interesting past thread on REIT's.
What percentage of total portfolio allocation to REIT's?
viewtopic.php?f=1&t=283581&hilit=reit

13 page thread:
Why are you not buying rental properties?
Input varies. Feasibility and diversification.
viewtopic.php?f=2&t=269901

Specifically: What type of R/E performing what role of diversification are you referring to?

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Re: is real estate dead as a diversifier?

Post by Ferdinand2014 » Wed Sep 11, 2019 12:04 pm

My home as real estate is a hedge against inflation as I don’t have rising rent since I own it.
I hold REITS only as much as what is in the S&P 500.
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Re: is real estate dead as a diversifier?

Post by abuss368 » Thu Sep 12, 2019 12:50 pm

prk wrote:
Tue Sep 10, 2019 11:18 am
I have seen many posts suggesting that RE is no longer a good diversifier. true?
The major asset classes are stocks, bonds, real estate, and cash. Perhaps an argument could be made for commodities.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: is real estate dead as a diversifier?

Post by abuss368 » Thu Sep 12, 2019 12:51 pm

We have invested in both US and International REITs for a long time and they have performed well. They fall in and out of favor like anything else. Many years ago we invested in individual REITs and now simply Vanguard's mutual funds.
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Re: is real estate dead as a diversifier?

Post by nisiprius » Thu Sep 12, 2019 12:57 pm

As a wag once said on the forum, "low correlation means is that in a crisis, your holdings don't all crash at the same speed."

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Re: is real estate dead as a diversifier?

Post by nedsaid » Thu Sep 12, 2019 3:13 pm

ohai wrote:
Tue Sep 10, 2019 4:19 pm
Pretty convoluted explanation to try to explain away wrong use of terminology...
Please don't comment if you aren't interested in real discussion. Just amazing that some folks would rather parse words than discuss investment concepts.
A fool and his money are good for business.

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Re: is real estate dead as a diversifier?

Post by packer16 » Thu Sep 12, 2019 3:22 pm

If you look at triple-net lease REITs (STOR, O, NNN) they are more like bonds as they have claims to long term leases that are like bonds with increasing coupons collateralized with real estate. They also recovered quite quickly in 2008 as their bond like characteristics shone through.

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Re: is real estate dead as a diversifier?

Post by bikechuck » Thu Sep 12, 2019 5:34 pm

Ferdinand2014 wrote:
Wed Sep 11, 2019 12:04 pm
My home as real estate is a hedge against inflation as I don’t have rising rent since I own it.
I hold REITS only as much as what is in the S&P 500.
My property taxes and homeowners insurance seem to go up as fast or faster than inflation.

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Re: is real estate dead as a diversifier?

Post by abuss368 » Thu Sep 12, 2019 6:43 pm

ohai wrote:
Tue Sep 10, 2019 11:27 am
Diversify against what?
David Swensen has said real estate is not as correlated to stocks and is a good inflation fighter.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: is real estate dead as a diversifier?

Post by abuss368 » Thu Sep 12, 2019 6:45 pm

Forester wrote:
Tue Sep 10, 2019 11:33 am
How about global REITs?
Vanguard international REITs and US REITs appear to work well together.
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Re: is real estate dead as a diversifier?

Post by unclescrooge » Thu Sep 12, 2019 6:49 pm

Phineas J. Whoopee wrote:
Tue Sep 10, 2019 12:41 pm
Are there any REITs that invest only in gold mines? Based on recent threads they would seem to be the perfect diversifier. :wink:
PJW
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Re: is real estate dead as a diversifier?

Post by arsenalfan » Thu Sep 12, 2019 6:50 pm

Not for me.

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Re: is real estate dead as a diversifier?

Post by abuss368 » Thu Sep 12, 2019 9:28 pm

nedsaid wrote:
Tue Sep 10, 2019 3:01 pm
ohai wrote:
Tue Sep 10, 2019 2:20 pm
nedsaid wrote:
Tue Sep 10, 2019 11:28 am
ohai wrote:
Tue Sep 10, 2019 11:27 am
Diversify against what?
Inflation.
You hedge against inflation! You diversify against other investments, like stocks or something.
I am diversifying against certain risks that face an investor. To me, public enemy number one is the corrosive effect of inflation upon the purchasing power of the Dollar. Such things as REITs and TIPS are part of my arsenal against inflation as are stocks themselves. If we get an inflation spike, this is hard on both stocks and bonds, it can take both years to get you your inflation adjustment. REITs should fare better than stocks in an inflation spike and TIPS better than nominal bonds.

There is the issue of correlation between asset classes, historically REITs have had similar returns to stocks, often with low correlation to stocks. But correlations between asset classes do vary over time so this diversification benefit is not guaranteed. Also, correlations between asset classes tend to rise in a crisis. During the 2008-2009 financial crisis, only nominal Treasuries and certain Agency Bonds like GNMAs zigged while other asset classes zagged. Pretty much everything else fell in price.
Well said. These were some of the reasons David Swensen notes in his book “Unconventional Success”.
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Re: is real estate dead as a diversifier?

Post by rj49 » Fri Sep 13, 2019 2:25 am

There are alternatives to private ownership and public REITs. I have money in Fundrise, which are non-publicly-traded eREITs, with a fairly stable NAV and yields far above public REITs--I chose an income-oriented portfolio, and am currently getting 8% or so in dividends quarterly. Unlike public REIT indices, you're also not investing in malls or hospitals, but mostly rentals, new construction, some renovations, and some commercial developments. They have different funds based on geography, including ones in the LA and DC areas, so you get fairly broad diversification by type of housing and location.

The big potential drawback is low liquidity, with investments expected to stay in place for several years, until projects are finished or paid off, so there are restrictions and penalties on early withdrawals. I'm in it mainly for the income, with potential for gains, and I didn't invest any money I'd need any time soon, so I'm fine with those restrictions, and they even said they might temporarily restrict all redemptions in case of a recession, so there are definitely risks. But with bond yields falling again, and my house going up in price but not giving me current income, as a retiree I want some stakes in investments that don't rise and fall with stock and bond markets, like Fundrise or Streetshares Veterans Bonds (paying a steady 5% yield from crowdsourced investments in veteran's businesses and government contracts). I'm also in the lower tax brackets, so high current income is worth the tax hit (I rode out the 2007-2009 recession with most of my taxable assets in 6.25% Penfed CDs).

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Re: is real estate dead as a diversifier?

Post by DG99999 » Sat Sep 14, 2019 9:23 am

nedsaid wrote:
Thu Sep 12, 2019 3:13 pm
ohai wrote:
Tue Sep 10, 2019 4:19 pm
Pretty convoluted explanation to try to explain away wrong use of terminology...
Please don't comment if you aren't interested in real discussion. Just amazing that some folks would rather parse words than discuss investment concepts.
Agreed, most of us appreciate Nedsaid's years of helpful, insightful and cogent comments.
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

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Re: is real estate dead as a diversifier?

Post by willthrill81 » Sat Sep 14, 2019 10:42 am

CurlyDave wrote:
Tue Sep 10, 2019 1:35 pm
KyleAAA wrote:
Tue Sep 10, 2019 12:16 pm

...Assuming you mean physical real estate rather than REITs, doubly no.
I have lots of physical real estate and consider it a good diversifier. I do not like REITs.
My understanding is that rental properties as a whole did well throughout the GFC, especially those on the lower end of the price spectrum. IIRC, rents didn't go down in most markets and actually went up in many. Yes, the market value of the properties went down, but the income they were producing did not.
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Re: is real estate dead as a diversifier?

Post by nedsaid » Sat Sep 14, 2019 11:01 am

There is a point at which you have to listen politely but take folks comments with a bit of skepticism. One reason is that opinions can be all over the map. I remember not so long ago, Larry Swedroe was warning that REITs were very expensive and then saw an item that REITs were trading at a 10% discount to underlying property values (now they are trading at a premium). Then Tax Reform came along and REITs got a tax break, making them more attractive. What I am saying here is don't get yourself whipsawed here, you could find yourself in and out of REITs with every article or report. Just last night, I saw a guest on Nightly Business Report who was quite enthusiastic about REITs, he was a stock analyst for the REIT industry so you figure that pushing them to a TV audience is part of his job.

My primary reasons for owning REITs are that they have similar returns to stocks, often with low correlation to stocks. REITs are also pretty good inflation fighters, the underlying values of the properties adjust pretty quickly to inflation, rents can also be raised. Stocks also have good inflation fighting capabilities but it can take them longer than REITs to adjust to inflation spikes. There is also something about owning property.

My concern is that REITs have gotten too popular, mainly from the chase for yield in a low interest rate environment. I view them as fairly expensive but other financial assets are also fairly expensive. There is an active thread about the bond bubble. My view is that in the light of low interest rates, low inflation, and a fairly robust economy; valuations for most financial assets are maybe a bit high but not unreasonable.
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Re: is real estate dead as a diversifier?

Post by grok87 » Sat Sep 14, 2019 11:03 am

KyleAAA wrote:
Tue Sep 10, 2019 12:16 pm
Assuming you mean REITs, no. Correlations with the total market were quite high in the runup to and aftermath of the financial crisis, but were relatively low both before and after. The correlation has been creeping up the last few years, but it still stands below 0.6. It has worked okay as a diversifier.

https://www.portfoliovisualizer.com/ass ... &months=36

Assuming you mean physical real estate rather than REITs, doubly no.
thanks.
good link
over the same time period the correlation of us stocks with international stocks was 85%
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Re: is real estate dead as a diversifier?

Post by CurlyDave » Sat Sep 14, 2019 2:24 pm

willthrill81 wrote:
Sat Sep 14, 2019 10:42 am

...My understanding is that rental properties as a whole did well throughout the GFC, especially those on the lower end of the price spectrum. IIRC, rents didn't go down in most markets and actually went up in many. Yes, the market value of the properties went down, but the income they were producing did not.
That has been my experience.

There is another factor with physical rentals, which is that market timing is possible. RE is much less liquid than stocks and prices move much more slowly. For someone whose timeline is measured in decades, buying on the dips can produce a portfolio of lower cost properties.

Of course, the RE investor has to have the temperament and skills to manage the properties.

I am always amused by people who preach "fire your FA and DIY" in the stock/bond arena, but then think that a REIT or property manager is the way to go in the RE arena. I view a REIT as being similar to hiring a FA and a property manager.

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Re: is real estate dead as a diversifier?

Post by abuss368 » Sat Sep 14, 2019 4:31 pm

nedsaid wrote:
Sat Sep 14, 2019 11:01 am
There is a point at which you have to listen politely but take folks comments with a bit of skepticism. One reason is that opinions can be all over the map. I remember not so long ago, Larry Swedroe was warning that REITs were very expensive and then saw an item that REITs were trading at a 10% discount to underlying property values (now they are trading at a premium). Then Tax Reform came along and REITs got a tax break, making them more attractive. What I am saying here is don't get yourself whipsawed here, you could find yourself in and out of REITs with every article or report. Just last night, I saw a guest on Nightly Business Report who was quite enthusiastic about REITs, he was a stock analyst for the REIT industry so you figure that pushing them to a TV audience is part of his job.

My primary reasons for owning REITs are that they have similar returns to stocks, often with low correlation to stocks. REITs are also pretty good inflation fighters, the underlying values of the properties adjust pretty quickly to inflation, rents can also be raised. Stocks also have good inflation fighting capabilities but it can take them longer than REITs to adjust to inflation spikes. There is also something about owning property.

My concern is that REITs have gotten too popular, mainly from the chase for yield in a low interest rate environment. I view them as fairly expensive but other financial assets are also fairly expensive. There is an active thread about the bond bubble. My view is that in the light of low interest rates, low inflation, and a fairly robust economy; valuations for most financial assets are maybe a bit high but not unreasonable.
One can get whipped around on the subject of REITs over the years. I have tuned out this noise and simply invested in Vanguard US and Vanguard International REIT funds. They appear to compliment each other and provide additional diversification.
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Re: is real estate dead as a diversifier?

Post by abuss368 » Sat Sep 14, 2019 4:42 pm

If investors such as Sam Well (i.e. The REIT King) were cashing out of REITs and running for cover that may make investors pause and reconsider. Mr. Zell knows more about REIT investing than any of us and is not cashing out.
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Re: is real estate dead as a diversifier?

Post by EnjoyIt » Sat Sep 14, 2019 4:47 pm

abuss368 wrote:
Sat Sep 14, 2019 4:31 pm
nedsaid wrote:
Sat Sep 14, 2019 11:01 am
There is a point at which you have to listen politely but take folks comments with a bit of skepticism. One reason is that opinions can be all over the map. I remember not so long ago, Larry Swedroe was warning that REITs were very expensive and then saw an item that REITs were trading at a 10% discount to underlying property values (now they are trading at a premium). Then Tax Reform came along and REITs got a tax break, making them more attractive. What I am saying here is don't get yourself whipsawed here, you could find yourself in and out of REITs with every article or report. Just last night, I saw a guest on Nightly Business Report who was quite enthusiastic about REITs, he was a stock analyst for the REIT industry so you figure that pushing them to a TV audience is part of his job.

My primary reasons for owning REITs are that they have similar returns to stocks, often with low correlation to stocks. REITs are also pretty good inflation fighters, the underlying values of the properties adjust pretty quickly to inflation, rents can also be raised. Stocks also have good inflation fighting capabilities but it can take them longer than REITs to adjust to inflation spikes. There is also something about owning property.

My concern is that REITs have gotten too popular, mainly from the chase for yield in a low interest rate environment. I view them as fairly expensive but other financial assets are also fairly expensive. There is an active thread about the bond bubble. My view is that in the light of low interest rates, low inflation, and a fairly robust economy; valuations for most financial assets are maybe a bit high but not unreasonable.
One can get whipped around on the subject of REITs over the years. I have tuned out this noise and simply invested in Vanguard US and Vanguard International REIT funds. They appear to compliment each other and provide additional diversification.
If you don't mind me asking, doesn't the market index funds, US and ex-US already have REITS included? If so that would mean by buying specific REIT funds you are actually tilting towards that asset class? Is that diversification or is that concentrating towards that asset class?

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Re: is real estate dead as a diversifier?

Post by abuss368 » Sat Sep 14, 2019 4:54 pm

EnjoyIt wrote:
Sat Sep 14, 2019 4:47 pm
If you don't mind me asking, doesn't the market index funds, US and ex-US already have REITS included? If so that would mean by buying specific REIT funds you are actually tilting towards that asset class? Is that diversification or is that concentrating towards that asset class?
Correct. The Total Stock and Total International hold the market weight in REITs. This is additional real estate in a portfolio. Depends how you want to look at it or classify. There are opinions it may be additional diversification and opinions it may be a carve out/tilt/concentration of an asset class, or both!
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Re: is real estate dead as a diversifier?

Post by nedsaid » Sat Sep 14, 2019 4:55 pm

abuss368 wrote:
Sat Sep 14, 2019 4:31 pm
nedsaid wrote:
Sat Sep 14, 2019 11:01 am
There is a point at which you have to listen politely but take folks comments with a bit of skepticism. One reason is that opinions can be all over the map. I remember not so long ago, Larry Swedroe was warning that REITs were very expensive and then saw an item that REITs were trading at a 10% discount to underlying property values (now they are trading at a premium). Then Tax Reform came along and REITs got a tax break, making them more attractive. What I am saying here is don't get yourself whipsawed here, you could find yourself in and out of REITs with every article or report. Just last night, I saw a guest on Nightly Business Report who was quite enthusiastic about REITs, he was a stock analyst for the REIT industry so you figure that pushing them to a TV audience is part of his job.

My primary reasons for owning REITs are that they have similar returns to stocks, often with low correlation to stocks. REITs are also pretty good inflation fighters, the underlying values of the properties adjust pretty quickly to inflation, rents can also be raised. Stocks also have good inflation fighting capabilities but it can take them longer than REITs to adjust to inflation spikes. There is also something about owning property.

My concern is that REITs have gotten too popular, mainly from the chase for yield in a low interest rate environment. I view them as fairly expensive but other financial assets are also fairly expensive. There is an active thread about the bond bubble. My view is that in the light of low interest rates, low inflation, and a fairly robust economy; valuations for most financial assets are maybe a bit high but not unreasonable.
One can get whipped around on the subject of REITs over the years. I have tuned out this noise and simply invested in Vanguard US and Vanguard International REIT funds. They appear to compliment each other and provide additional diversification.
Sounds to me like an International Real Estate fund makes lots of sense. From what I have been reading, you get cheaper prices overseas. So a combination of the US and International REIT funds would diminish my concerns about US REITs in general.
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Re: is real estate dead as a diversifier?

Post by willthrill81 » Sat Sep 14, 2019 4:57 pm

EnjoyIt wrote:
Sat Sep 14, 2019 4:47 pm
If you don't mind me asking, doesn't the market index funds, US and ex-US already have REITS included?
IIRC, only about 3% of TSM is in REITs, which certainly isn't enough to 'move the needle'. There has been no statistically significant difference between TSM and large-caps.
EnjoyIt wrote:
Sat Sep 14, 2019 4:47 pm
If so that would mean by buying specific REIT funds you are actually tilting towards that asset class? Is that diversification or is that concentrating towards that asset class?
It depends on whether you believe REITs to provide significant diversification from market beta, which is all that TSM provides. Some say yes (e.g. Gresham), others say no (e.g. Sotiroff).
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Re: is real estate dead as a diversifier?

Post by abuss368 » Sat Sep 14, 2019 5:00 pm

nedsaid wrote:
Sat Sep 14, 2019 4:55 pm
abuss368 wrote:
Sat Sep 14, 2019 4:31 pm
nedsaid wrote:
Sat Sep 14, 2019 11:01 am
There is a point at which you have to listen politely but take folks comments with a bit of skepticism. One reason is that opinions can be all over the map. I remember not so long ago, Larry Swedroe was warning that REITs were very expensive and then saw an item that REITs were trading at a 10% discount to underlying property values (now they are trading at a premium). Then Tax Reform came along and REITs got a tax break, making them more attractive. What I am saying here is don't get yourself whipsawed here, you could find yourself in and out of REITs with every article or report. Just last night, I saw a guest on Nightly Business Report who was quite enthusiastic about REITs, he was a stock analyst for the REIT industry so you figure that pushing them to a TV audience is part of his job.

My primary reasons for owning REITs are that they have similar returns to stocks, often with low correlation to stocks. REITs are also pretty good inflation fighters, the underlying values of the properties adjust pretty quickly to inflation, rents can also be raised. Stocks also have good inflation fighting capabilities but it can take them longer than REITs to adjust to inflation spikes. There is also something about owning property.

My concern is that REITs have gotten too popular, mainly from the chase for yield in a low interest rate environment. I view them as fairly expensive but other financial assets are also fairly expensive. There is an active thread about the bond bubble. My view is that in the light of low interest rates, low inflation, and a fairly robust economy; valuations for most financial assets are maybe a bit high but not unreasonable.
One can get whipped around on the subject of REITs over the years. I have tuned out this noise and simply invested in Vanguard US and Vanguard International REIT funds. They appear to compliment each other and provide additional diversification.
Sounds to me like an International Real Estate fund makes lots of sense. From what I have been reading, you get cheaper prices overseas. So a combination of the US and International REIT funds would diminish my concerns about US REITs in general.
That has been my experience. When one seems to sing the other yangs. There has been some favorable articles about international real estate and the possibility of being undervalued.
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Re: is real estate dead as a diversifier?

Post by abuss368 » Sat Sep 14, 2019 5:01 pm

EnjoyIt wrote:
Sat Sep 14, 2019 4:47 pm
If you don't mind me asking, doesn't the market index funds, US and ex-US already have REITS included? If so that would mean by buying specific REIT funds you are actually tilting towards that asset class? Is that diversification or is that concentrating towards that asset class?
Total Stock holds the market's weight in REITs - approximately 3%. Rick Ferri has provided a nice summary and strategy over the years for allocating a larger percentage to REITs to align more with the real economy.
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Re: is real estate dead as a diversifier?

Post by Stormbringer » Sat Sep 14, 2019 6:24 pm

willthrill81 wrote:
Sat Sep 14, 2019 10:42 am
My understanding is that rental properties as a whole did well throughout the GFC
The financial crisis was a boon for rental properties in my market:
  • I refinanced all mine at rock-bottom rates, lowering the monthly interest expense.
  • Housing starts plummeted while the population continued to increase. Rents have gone nowhere but up, and vacancy rates have been low.
  • I was buying several new ones each year for half what they cost a few years earlier.
  • Property values are now rising at a brisk pace.
As for diversification, I treat real estate as a third asset class, distinctly different from equities and bonds, and having some characteristics of each.
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Re: is real estate dead as a diversifier?

Post by Sandtrap » Sat Sep 14, 2019 8:31 pm

Stormbringer wrote:
Sat Sep 14, 2019 6:24 pm
willthrill81 wrote:
Sat Sep 14, 2019 10:42 am
My understanding is that rental properties as a whole did well throughout the GFC
The financial crisis was a boon for rental properties in my market:
  • I refinanced all mine at rock-bottom rates, lowering the monthly interest expense.
  • Housing starts plummeted while the population continued to increase. Rents have gone nowhere but up, and vacancy rates have been low.
  • I was buying several new ones each year for half what they cost a few years earlier.
  • Property values are now rising at a brisk pace.
As for diversification, I treat real estate as a third asset class, distinctly different from equities and bonds, and having some characteristics of each.
Outstanding!
One can also include a percentage each of physically held R/E income property and REIT's. Each have different characteristics.

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Re: is real estate dead as a diversifier?

Post by abuss368 » Sun Sep 15, 2019 11:27 am

Sandtrap wrote:
Sat Sep 14, 2019 8:31 pm
Stormbringer wrote:
Sat Sep 14, 2019 6:24 pm
willthrill81 wrote:
Sat Sep 14, 2019 10:42 am
My understanding is that rental properties as a whole did well throughout the GFC
The financial crisis was a boon for rental properties in my market:
  • I refinanced all mine at rock-bottom rates, lowering the monthly interest expense.
  • Housing starts plummeted while the population continued to increase. Rents have gone nowhere but up, and vacancy rates have been low.
  • I was buying several new ones each year for half what they cost a few years earlier.
  • Property values are now rising at a brisk pace.
As for diversification, I treat real estate as a third asset class, distinctly different from equities and bonds, and having some characteristics of each.
Outstanding!
One can also include a percentage each of physically held R/E income property and REIT's. Each have different characteristics.

j :happy
They do have different characteristics in terms of the vehicle used to get there. At the end of the day the vehicle for real estate could be direct ownership, private placements, and REITs. Real estate is at the core of each.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: is real estate dead as a diversifier?

Post by alex_686 » Sun Sep 15, 2019 6:11 pm

grok87 wrote:
Sat Sep 14, 2019 11:03 am
KyleAAA wrote:
Tue Sep 10, 2019 12:16 pm
Assuming you mean REITs, no. Correlations with the total market were quite high in the runup to and aftermath of the financial crisis, but were relatively low both before and after. The correlation has been creeping up the last few years, but it still stands below 0.6. It has worked okay as a diversifier.

https://www.portfoliovisualizer.com/ass ... &months=36

Assuming you mean physical real estate rather than REITs, doubly no.
thanks.
good link
over the same time period the correlation of us stocks with international stocks was 85%
Sigh, not a good link. It suggests things which are not true.

First, correlations assume that volatility is constant. If volatalities are not constants - well, "Garbage In, Garbage Out" as they say. If you increased volatility of independent variables correlations increase to 1 one - even if there is no causal relationship or if the underlying asset or if the assets are actually good diversifies. It just a statistical artifact as it stands.

Second,lets review what actually happened. A sub-sector diversifying asset (REITs) blew up and took down the real economy and the stock market. Of course correlations are going to be high when your sub-sector diversifying asset blows up the real economy. See the dot.com bust, where a subclass asset blew up the real economy. In that specific case REITs held up pretty well.

It helps to know what you are seeing and put it into the right context.

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