Which stock would you invest in?

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Liquidate
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Which stock would you invest in?

Post by Liquidate »

So I was looking at the outline about portfolio investing but I just had a question about 2 specific stocks.
Ultimately the only important information is that I have years before I retire unless a business takes off so the funds will stay at a minimum of 10-15 years if not until retirement age which is around 30 years.

I like the balance of my portfolio but I came around an article that was interesting about CEF's, or close ended funds. I have a relative sizable portion in my 401k that is strictly in real estate. VNQ to be exact and I like the performance. I just read an article on RQI which is a closed ended fund in real estate and modeled a few scenarios using portfoliovisualizer to see what it would look like if I kept VNQ vs RQI over the last 10 years and RQI came way ahead.

VNQ -
Expense Ratio: 0.12%
10 Year Return: 15.47%
Quarterly Dividends

RQI -
Expense Ratio: 2.17%
10 Year Return: 21.71%
Monthly Payments

I don't know much about CEF other than what I recently read. I know that everyone touts that the best is to have lower expense fees. I'm looking at long term growth so would it be in my best interest to move out of VNQ and put it in RQI? I'm looking at getting the monthly dividends and having it reinvested, not taking any money out.

Thanks for taking the time to read and if there's anything else I need to provide I can.
-Liquidate
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David Jay
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Re: Which stock would you invest in?

Post by David Jay »

Welcome to the forum!
Liquidate wrote: Fri Sep 13, 2019 4:26 pmI don't know much about CEF other than what I recently read. I know that everyone touts that the best is to have lower expense fees.
May I suggest that if you don’t know much about CEFs, use this search string to see previous BH discussions: https://www.google.com/search?sitesearc ... +end+funds

I don’t know much either, but from what I have read on threads from that link:
1. The funds have high expense ratios due in part to the borrowing cost of leverage
2. Leverage means that these funds have high risk
3. The funds trade at discount to NAV and that needs to be understood
4. The funds are illiquid
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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abuss368
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Re: Which stock would you invest in?

Post by abuss368 »

I would reconsider closed end funds for the reasons noted. There could be liquidity issues.

Consider investing in a few total market index funds and tune out the market noise. Well into the future you will be thankful for the simplicity and results.
John C. Bogle: “Simplicity is the master key to financial success."
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HomerJ
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Re: Which stock would you invest in?

Post by HomerJ »

Liquidate wrote: Fri Sep 13, 2019 4:26 pmwould it be in my best interest to move out of VNQ and put it in RQI?
No.
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Ferdinand2014
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Re: Which stock would you invest in?

Post by Ferdinand2014 »

I would never consider investing in RQI.
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Re: Which stock would you invest in?

Post by Vanguard Fan 1367 »

I vote for VNQ.
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Re: Which stock would you invest in?

Post by surfstar »

"I have a relative sizable portion in my 401k that is strictly in real estate."

Most Bogleheads recommend no more than 5-10% in REITs, FYI
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nedsaid
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Re: Which stock would you invest in?

Post by nedsaid »

abuss368 wrote: Fri Sep 13, 2019 10:33 pm I would reconsider closed end funds for the reasons noted. There could be liquidity issues.

Consider investing in a few total market index funds and tune out the market noise. Well into the future you will be thankful for the simplicity and results.
The other thing to consider with closed end fund is whether they trade at a discount or premium to net asset value. According to Morningstar, the closed end fund you cited is trading at a 4.19% premium to net asset value. The expense ratio for RQI is listed as 2.17%. I think I would stick with the Vanguard product.

Closed end funds trade just like stocks. If trading volumes are thin, you would face higher bid/ask costs than you would with Vanguard's REIT ETF product. The thin trading volume is the lack of liquidity referred to above, doesn't mean you can't sell it but it means you could pay a substantial spread, my guess is 2% to 3% in addition to commission.

I haven't owned a closed end fund for years. ETFs are the better product in my opinion.
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Re: Which stock would you invest in?

Post by z3r0c00l »

I wouldn't especially invest in VNQ because I already have REITs in my regular mutual funds, but of the two choices here VNQ is a no-brainer to me. It is still, however, a very risky investment. But it sure has performed well!
Cyanide123
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Re: Which stock would you invest in?

Post by Cyanide123 »

2 percent expense ratio??? Wow. No thank you.
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David Jay
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Re: Which stock would you invest in?

Post by David Jay »

Liquidate wrote: Fri Sep 13, 2019 4:26 pm...modeled a few scenarios using portfoliovisualizer to see what it would look like if I kept VNQ vs RQI over the last 10 years and RQI came way ahead.
Using the last 10 years is very misleading.

10 years ago was the beginning of the recovery from the financial crisis, a leveraged fund will do better than a regular fund in an “up” market. But it will suffer more in a “down” market. Use portfoliovisualizer from 2006 and see what you get - the fund is still down over 40% from 2006 highs. It looks like this:

Image

So NAV went from about 26 to about 2. In rough numbers: $100,000 became $7,700
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
Liquidate
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Re: Which stock would you invest in?

Post by Liquidate »

Thank you to everyone that replied. And for some of those that stated it shouldn't be more than 10%, it is not so no worries on that.

For David Jay, I had initially modeled after an article about Warren Buffets Vanguard stocks for his wife after he passes away compared to mine and I pretty much operate the same with different funds. I didn't use a clean slate when I modeled the RQI vs VNQ and after doing a new comparison going back to 2006 as you stated I see that RQI is actually worse when I initially had it modeled and it performed about 1.5x better over a 10 year period.

Image

So thank you for everyone's help, I'm keeping it in VNQ!
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Wiggums
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Re: Which stock would you invest in?

Post by Wiggums »

I am not interested in those two funds in general. Also, those expense ratio are very high. Fees matter. I would recommend the Vanguard, Fidelity or Schwab index products.
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unclescrooge
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Re: Which stock would you invest in?

Post by unclescrooge »

Liquidate wrote: Fri Sep 13, 2019 4:26 pm So I was looking at the outline about portfolio investing but I just had a question about 2 specific stocks.
Ultimately the only important information is that I have years before I retire unless a business takes off so the funds will stay at a minimum of 10-15 years if not until retirement age which is around 30 years.

I like the balance of my portfolio but I came around an article that was interesting about CEF's, or close ended funds. I have a relative sizable portion in my 401k that is strictly in real estate. VNQ to be exact and I like the performance. I just read an article on RQI which is a closed ended fund in real estate and modeled a few scenarios using portfoliovisualizer to see what it would look like if I kept VNQ vs RQI over the last 10 years and RQI came way ahead.

VNQ -
Expense Ratio: 0.12%
10 Year Return: 15.47%
Quarterly Dividends

RQI -
Expense Ratio: 2.17%
10 Year Return: 21.71%
Monthly Payments

I don't know much about CEF other than what I recently read. I know that everyone touts that the best is to have lower expense fees. I'm looking at long term growth so would it be in my best interest to move out of VNQ and put it in RQI? I'm looking at getting the monthly dividends and having it reinvested, not taking any money out.

Thanks for taking the time to read and if there's anything else I need to provide I can.
-Liquidate
RQI is currently selling at a premium to NAV. for this reason alone I would skip it.

Also, it is leveraged 25%, meaning in the next down turn it will fall a lot more than an unleveraged fund.
This is another reason to skip.

And the third reason to avoid it is you are unfamiliar with the product itself, and probably what it holds. I think you're better off holding a low cost, broad ETF like VNQ or REET than a specialized, leveraged closed end fund.
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