Funds that don't correlate with stock market

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 6:28 pm

SlowMovingInvestor wrote:
Sun Jan 12, 2020 6:25 pm
willthrill81 wrote:
Sun Jan 12, 2020 6:11 pm
Rental real estate is the only investment I'm aware of that has historically been a strong competitor for stocks in terms of returns, but as I noted above, it's not usually passive.
This leads to the question -- would it then make sense to use residential REITS (including those that specialize in single family housing) as a diversifier ?
No, they're really no better than other REITs; they still behave like equities, with equity risk.
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SlowMovingInvestor
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Re: Funds that don't correlate with stock market

Post by SlowMovingInvestor » Sun Jan 12, 2020 6:32 pm

watchnerd wrote:
Sun Jan 12, 2020 6:28 pm
SlowMovingInvestor wrote:
Sun Jan 12, 2020 6:25 pm
willthrill81 wrote:
Sun Jan 12, 2020 6:11 pm
Rental real estate is the only investment I'm aware of that has historically been a strong competitor for stocks in terms of returns, but as I noted above, it's not usually passive.
This leads to the question -- would it then make sense to use residential REITS (including those that specialize in single family housing) as a diversifier ?
No, they're no better than other REITs; they still behave like equities, with equity risk.
Why though ? I'm not trying to be argumentative here, I'm just trying to understand why rental real estate might not be correlated with the stock market, but residential REITS would be ? Is it because you expect the actual market value of residential real estate to go up? Is it because the sources of capital for both are different ?

Or is it because some of the larger residential REITs (such as Avalon Bay) have holdings in so many communities, that they are roughly correlated with the economy, and hence the stock market ?
Last edited by SlowMovingInvestor on Sun Jan 12, 2020 6:33 pm, edited 1 time in total.

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willthrill81
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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 6:33 pm

SlowMovingInvestor wrote:
Sun Jan 12, 2020 6:25 pm
willthrill81 wrote:
Sun Jan 12, 2020 6:11 pm
Rental real estate is the only investment I'm aware of that has historically been a strong competitor for stocks in terms of returns, but as I noted above, it's not usually passive.
This leads to the question -- would it then make sense to use residential REITS (including those that specialize in single family housing) as a diversifier ?
No. Landlords who weren't overly leveraged generally did pretty well during the Great Recession. Some markets actually saw their rents go up. Yes, the market value of the properties went down for most, but the income the properties generated was typically very stable. Compare that to REITs, which were absolutely decimated. Vanguard's VGSNX lost 70% of its inflation-adjusted value from February, 2007, to March, 2009.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 6:43 pm

SlowMovingInvestor wrote:
Sun Jan 12, 2020 6:32 pm


Why though ? I'm not trying to be argumentative here, I'm just trying to understand why rental real estate might not be correlated with the stock market, but residential REITS would be ? Is it because you expect the actual market value of residential real estate to go up? Is it because the sources of capital for both are different ?

Or is it because some of the larger residential REITs (such as Avalon Bay) have holdings in so many communities, that they are roughly correlated with the economy, and hence the stock market ?
Why is local Mom & Pop hamburger shop's business not well correlated with McDonald's stock price? Because the business models and finances are totally different.

REITs are financial instruments, first and foremost, that:

a) Are required by law to pass through the majority of their earnings to shareholders as dividends
b) Have demand that can rise and fall relative to other sources of interest / dividend income. If CD rates go up, REITs can look less attractive for yield seekers
c) Appreciation of the physical properties held (regardless of what they are) is less important than the cashflow from said properties because of a) and b).

Neither a) nor b) are true of local residential real estate investments. While c) can be very important for landlording.
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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 6:45 pm

lexor wrote:
Sun Jan 12, 2020 12:12 pm
I know you can buy gold or silver or even bitcoin, but I don't like buying commodities. What are stocks and ETFs that don't correlate strongly with the rest of the stock market?

Some ideas
Companies that deal in precious metals or other precious resources
REITs
Some bonds funds
Utilities Stocks/ETFs

What are the best options for having decent returns normally but still protecting in a downturn?
BTW, have you looked at MLPs?

I had some great MLP investment in the 2000s, although the taxes are a complete PITA.
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SlowMovingInvestor
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Re: Funds that don't correlate with stock market

Post by SlowMovingInvestor » Sun Jan 12, 2020 6:52 pm

watchnerd wrote:
Sun Jan 12, 2020 6:43 pm
SlowMovingInvestor wrote:
Sun Jan 12, 2020 6:32 pm

Why though ? I'm not trying to be argumentative here, I'm just trying to understand why rental real estate might not be correlated with the stock market, but residential REITS would be ? Is it because you expect the actual market value of residential real estate to go up? Is it because the sources of capital for both are different ?

Or is it because some of the larger residential REITs (such as Avalon Bay) have holdings in so many communities, that they are roughly correlated with the economy, and hence the stock market ?
Why is local Mom & Pop hamburger shop's business not well correlated with McDonald's stock price? Because the business models and finances are totally different.

REITs are financial instruments, first and foremost, that:

a) Are required by law to pass through the majority of their earnings to shareholders as dividends
b) Have demand that can rise and fall relative to other sources of interest / dividend income. If CD rates go up, REITs can look less attractive for yield seekers
c) Appreciation of the physical properties held (regardless of what they are) is less important than the cashflow from said properties because of a) and b).

Neither a) nor b) are true of local residential real estate investments. While c) can be very important for landlording.
Given the rates of failure of local restaurants compared to McDonalds, I'm not sure that analogy favors direct ownership of residential real estate :happy

a) by itself shouldn't matter except in that it leads to b) -- REITs being valued as an income investment. And that I agree is a valid point.

c) is very valid. Although one could argue that if real estate values go up, rents will eventually follow in the long term. The counterargument to that of course is that residential real estate does go through speculative bouts, where rents stay stable, while values rise. And I suppose in extreme downturns like 2008, people keep renting even if values fall because they're afraid to buy (that would lead to multiple compression in the short term, but in the long term residential REITs should be OK).

Or to put it another way -- if a landlord had sought to sell in 2008/9, he or she would likely have done poorly, just as an investor who sold residential REITs would have done badly. But if rents held up, one would expect FFO for residential REITs to be stable, and multiples to compress ?

I do believe that single family homes were hit the most in the crisis, and there were few single family REITs. Now we do have some such as AMH and INVH.

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 7:01 pm

SlowMovingInvestor wrote:
Sun Jan 12, 2020 6:52 pm


Given the rate of failure of local restaurants to McDonalds, I'm not sure that analogy favors direct ownership of residential real estate :happy
It wasn't meant to favor either one --- just point out how different they are.

And, in parallel, I suspect many Mom & Pop residential landlords aren't nearly as profitable as companies like Avalon and would "fail more" if residential real estate investments were looked at purely on a cashflow basis, as opposed to factoring property appreciation into the returns picture.
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garlandwhizzer
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Re: Funds that don't correlate with stock market

Post by garlandwhizzer » Sun Jan 12, 2020 7:01 pm

whodidntante wrote:

I'm not a fan of the "safe" equities mindset. I think all equities are risky. If you need safety, go buy something that is actually safe. Or you can use trend following which has historically reduced drawdowns.
1+

This is my point of view as well. It is a matter of personal taste/opinion, but IMO it's very difficult to find something other than quality bonds that offer significant safety when equity tanks which is when you need stability in reality rather than theory. In really bad bear markets correlations of all risk assets approach 1.0 and the only reliable safety is found in bonds. It is an easy exercise in math to pick which alternate assets/fund approaches in which proportions worked optimally to reduce risk/volatility while at the same time not diminishing portfolio returns significantly over a given time frame. There is, however, no certainty that these same alternates held in the same proportions are going to work in the same way going forward. This is an important lesson learned the hard way by those who loaded up on commodities during the later stages of the last commodity super-cycle. Back then replacing some equity with commodities looked great on backtesting with improved returns and reduced risk/volatility. The only problem was that all that reversed going forward. There is great appeal in the concept of stock-like returns with bond-like risk, but I'm not sure any alternate or any fund seeking that goal lives up that concept.

The question is how much real portfolio protection do you get for the opportunity cost of choosing alternate approaches instead of traditional equity while the bull market keeps running? The market spends the large majority of its time in bull markets and in bulls traditional equity is expected to outperform low equity correlation alternates. I think the argument can be made that quality bonds dollar for dollar provide the most protection in downturns. Bonds provide a given level of portfolio protection with a lower allocation than alternates do, which allows you to hold more traditional equity at the same level of risk. It's up the individual investor but for me, alternates look like a solution in search of a problem.

Garland Whizzer

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 7:06 pm

garlandwhizzer wrote:
Sun Jan 12, 2020 7:01 pm
whodidntante wrote:

I'm not a fan of the "safe" equities mindset. I think all equities are risky. If you need safety, go buy something that is actually safe. Or you can use trend following which has historically reduced drawdowns.
1+

This is my point of view as well. It is a matter of personal taste/opinion, but IMO it's very difficult to find something other than quality bonds that offer significant safety when equity tanks which is when you need stability in reality rather than theory. In really bad bear markets correlations of all risk assets approach 1.0 and the only reliable safety is found in bonds.
And cash.

My cash allocation lowers my effective barbelled bond duration, is less sensitive to interest rate shocks, and is even safer than bonds.

Yes, the return sucks and sometimes loses to inflation, but it's an insurance policy / working capital reserves.
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grog
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Re: Funds that don't correlate with stock market

Post by grog » Mon Jan 13, 2020 11:21 am

People are too scared to hold stocks and too greedy to settle for bonds. That's when they get themselves into trouble.

I dislike the "animal spirits" of the market as much as anyone but I'm willing to tolerate it if I'm compensated for it. I've learned to stop worrying and love the Beta.

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Mon Jan 13, 2020 11:43 am

grog wrote:
Mon Jan 13, 2020 11:21 am
People are too scared to hold stocks and too greedy to settle for bonds. That's when they get themselves into trouble.
If stocks start returning in the 5-7% over the next 10 years like many long range reports predict and cognitive dissonance versus the past kicks in, then the fun will really start.
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lexor
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Re: Funds that don't correlate with stock market

Post by lexor » Mon Jan 13, 2020 11:52 am

watchnerd wrote:
Mon Jan 13, 2020 11:43 am
grog wrote:
Mon Jan 13, 2020 11:21 am
People are too scared to hold stocks and too greedy to settle for bonds. That's when they get themselves into trouble.
If stocks start returning in the 5-7% over the next 10 years like many long range reports predict and cognitive dissonance versus the past kicks in, then the fun will really start.
What are the predictions for REITs?

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Mon Jan 13, 2020 3:07 pm

lexor wrote:
Mon Jan 13, 2020 11:52 am
watchnerd wrote:
Mon Jan 13, 2020 11:43 am
grog wrote:
Mon Jan 13, 2020 11:21 am
People are too scared to hold stocks and too greedy to settle for bonds. That's when they get themselves into trouble.
If stocks start returning in the 5-7% over the next 10 years like many long range reports predict and cognitive dissonance versus the past kicks in, then the fun will really start.
What are the predictions for REITs?
JP Morgan estimates from "2020 Long Term Capital Markets Assumptions", (USD, compound return):

US REITs: 6.0%

For comparison:

US Large Cap: 5.6%
US Small Cap: 6.5%
AC World Equity: 6.5%
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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