REITs for diversification

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Re: REITs for diversification

Post by watchnerd »

abuss368 wrote: Thu Apr 22, 2021 8:53 pm
watchnerd wrote: Thu Apr 22, 2021 12:35 pm
Interestingly, instead of putting 15% in REITs, putting 15% in healthcare (VGHAX) *would* have softened the blow.

Note:

I'm not saying that over-weighting healthcare is a future path to better risk-adjusted returns.

Just that stock sector tilts increase the dispersion of possible outcomes (duh) -- sometimes they're better than the market, often times worse.
I have a colleague who holds:

Total Stock
Vanguard High Dividend
Vanguard REIT
IShares Extended Technology
Vanguard Healthcare
Vanguard Energy (at times)
Vangurd Total Bond

Whatever is on sale he buys. Been doing this 30 years. Has done very very well for himself. Has no interest in overseas markets.

Tony
If you deviate substantially from the market, sometimes you can outperform it.

Or not.
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Re: REITs for diversification

Post by abuss368 »

watchnerd wrote: Thu Apr 22, 2021 8:58 pm
abuss368 wrote: Thu Apr 22, 2021 8:53 pm
watchnerd wrote: Thu Apr 22, 2021 12:35 pm
Interestingly, instead of putting 15% in REITs, putting 15% in healthcare (VGHAX) *would* have softened the blow.

Note:

I'm not saying that over-weighting healthcare is a future path to better risk-adjusted returns.

Just that stock sector tilts increase the dispersion of possible outcomes (duh) -- sometimes they're better than the market, often times worse.
I have a colleague who holds:

Total Stock
Vanguard High Dividend
Vanguard REIT
IShares Extended Technology
Vanguard Healthcare
Vanguard Energy (at times)
Vangurd Total Bond

Whatever is on sale he buys. Been doing this 30 years. Has done very very well for himself. Has no interest in overseas markets.

Tony
If you deviate substantially from the market, sometimes you can outperform it.

Or not.
Indeed. My colleague? Built a huge cash flow stream and retired from the dividends alone. Paid retirement and retired a long time now. Also crowdfunded real estate and direct ownership earlier.

Tony
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Re: REITs for diversification

Post by nisiprius »

mrmass wrote: Thu Apr 22, 2021 10:07 am Great learning here
https://www.reit.com/
This is the official website of NAREIT, the National Association of Real Estate Investment Trusts. According to the website,
Our Mission

To actively advocate for REIT-based real estate investment with policymakers and the global investment community.
They may be a valuable source of information, but keep in mind that they are not at all disinterested or neutral. Their job is to promote REITs.
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Re: REITs for diversification

Post by abuss368 »

I have a very good friend who retired early and now lives from the dividends only of total market index funds. One of his holdings was Vanguard REIT.

I have seen this success up close and personal and it has been reassuring.

Tony
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Re: REITs for diversification

Post by abuss368 »

vineviz wrote: Wed Apr 21, 2021 9:56 am
Doc wrote: Wed Apr 21, 2021 9:54 am
vineviz wrote: Wed Apr 21, 2021 7:56 am REITs are a demonstrably poor way to "soften the blow of a market crash".
In a link given somewhere: viewtopic.php?f=1&t=346582
Valuethinker wrote:David Swensen also takes the reader through the private REIT "industry" and the harm it causes investors. No doubt Larry Swedroe has something pithy to say in his books.
Swedroe wrote:Instead, the winning strategy is to hold as much equity as possible in taxable accounts and hold taxable fixed-income investments and tax inefficient REITs in tax deferred accounts.
"The Only Guide to a Winning Investment Strategy You'll Ever Need" Swedroe & Hempen first edition p203
REITs are a demonstrably poor way to "soften the blow of a market crash".
I could not tell if Vineviz was a fan of REITs or not.

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Re: REITs for diversification

Post by Ivygirl »

In my opinion the 2008-2009 major downturn for REITs is a big plus for their future returns. Think of it as an immunization against the follies that caused that downturn.

REITs will always have their dramatic cycles but the real estate crisis of 2008-2009 is not going to happen again in the same way, precisely because it was so traumatic. Maybe there will be different mistakes. But not that one.

REITs are not going to cushion any downturn, for all the excellent reasons already given, but shouldn't diversification capture upside too? What has made more wealth than real estate?
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 10:26 am but shouldn't diversification capture upside too? What has made more wealth than real estate?
But REITs aren't real estate, i.e a separate asset class from stocks.

They're just a sector of stocks, like utilities, manufacturing, etc.

If you hold TSM, you already hold REITs at market weight.
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Re: REITs for diversification

Post by Ivygirl »

watchnerd wrote: Sat Oct 30, 2021 10:31 am
Ivygirl wrote: Sat Oct 30, 2021 10:26 am but shouldn't diversification capture upside too? What has made more wealth than real estate?
But REITs aren't real estate, i.e a separate asset class from stocks.

They're just a sector of stocks, like utilities, manufacturing, etc.

If you hold TSM, you already hold REITs at market weight.
"Just a sector" is a phrase that does not compute for me. A sector is such because it is different from the rest. That difference may or may not cause the asset to make money in a given environment, but how can one dismiss a real difference. REITs are different from stocks of companies that make things and provide services, REITs are stocks tied to physical control of real estate. What has made more wealth than real estate?

As a small investor, it's not practical for me to capture any of the upside from this sector by owning personally a large number of physical properties, or by attempting to join other individuals to buy specific properties. An index is best, so that's how I own it. If there were no index I would probably be limited to gaining via appreciation on my house.
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Re: REITs for diversification

Post by watchnerd »

Ivygirl wrote: Sat Oct 30, 2021 10:54 am
"Just a sector" is a phrase that does not compute for me
It may not compute for you, but that's what the research found:

REITs are not a separate asset class

By over-weighting REITs, you're just sector tilting within stocks.

Which, if you want do that, that's your business -- lots of people tilt towards dividend stocks, utilities, etc.

But that doesn't make REITs a unique asset class with special diversification properties, and 'diversification' is the topic of the thread.
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Re: REITs for diversification

Post by Ivygirl »

watchnerd wrote: Sat Oct 30, 2021 10:58 am
Ivygirl wrote: Sat Oct 30, 2021 10:54 am
"Just a sector" is a phrase that does not compute for me
It may not compute for you, but that's what the research found:

REITs are not a separate asset class

By over-weighting REITs, you're just sector tilting within stocks.

Which, if you want do that, that's your business -- lots of people tilt towards dividend stocks, utilities, etc.

But that doesn't make REITs a unique asset class with special diversification properties, and 'diversification' is the topic of the thread.
I think that research is silly. Use your eyes. REITs are different. We may sometimes see them traveling in the same herd as other stocks, but a zebra is not a wildebeest.

I see by your signature that you hold 2% in crypto and securitized gold. Now granted neither of those is a stock. But I assume you see their differences as adding to your wealth over time. Diversification is supposed to do that.
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 11:13 am
I think that research is silly. Use your eyes. REITs are different. We may sometimes see them traveling in the same herd as other stocks, but a zebra is not a wildebeest.
They're not different enough from other stocks to provide significant diversification from other stocks.

Which is what many of the posts upthread are pointing out.

Bonds, cash, and physical real estate, they are not. Those are real diversifiers.
Last edited by watchnerd on Sat Oct 30, 2021 11:33 am, edited 1 time in total.
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Re: REITs for diversification

Post by YRT70 »

Ivygirl wrote: Sat Oct 30, 2021 11:13 am
watchnerd wrote: Sat Oct 30, 2021 10:58 am
Ivygirl wrote: Sat Oct 30, 2021 10:54 am
"Just a sector" is a phrase that does not compute for me
It may not compute for you, but that's what the research found:

REITs are not a separate asset class

By over-weighting REITs, you're just sector tilting within stocks.

Which, if you want do that, that's your business -- lots of people tilt towards dividend stocks, utilities, etc.

But that doesn't make REITs a unique asset class with special diversification properties, and 'diversification' is the topic of the thread.
I think that research is silly. Use your eyes. REITs are different. We may sometimes see them traveling in the same herd as other stocks, but a zebra is not a wildebeest.

I see by your signature that you hold 2% in crypto and securitized gold. Now granted neither of those is a stock. But I assume you see their differences as adding to your wealth over time. Diversification is supposed to do that.
Larry Swedroe covers REITs here: https://www.etf.com/sections/index-inve ... nopaging=1

Ben Felix video: https://www.youtube.com/watch?v=IzK5x3LlsUU
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Re: REITs for diversification

Post by Ivygirl »

watchnerd wrote: Sat Oct 30, 2021 11:22 am
Ivygirl wrote: Sat Oct 30, 2021 11:13 am
I think that research is silly. Use your eyes. REITs are different. We may sometimes see them traveling in the same herd as other stocks, but a zebra is not a wildebeest.
They're not different enough from other stocks to provide significant diversification from other stocks.

Which is what all the posts upthread are pointing out.

Bonds, cash, and physical real estate, they are not. Those are real diversifiers.
Granted, physical real estate provides more diversification from stocks than a REIT index. But that could be a bad thing, right? Exposure to the downside of a particular property in a particular market. That's the kind of diversification I don't need.
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 11:32 am
Granted, physical real estate provides more diversification from stocks than a REIT index. But that could be a bad thing, right? Exposure to the downside of a particular property in a particular market. That's the kind of diversification I don't need.
Sure, diversification could mean 'doesn't do as well'.

Cash certainly doesn't do as well as most asset classes, most of the time, as it loses to inflation.

But that's not really the point of this thread.

This thread was asking, specifically, if REITs provide a cushion for stock market down turns.

And, perhaps unsurprisingly, as stocks, they really don't.

The better diversification from stock market risk is to own things that aren't stocks at all.
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Re: REITs for diversification

Post by Ivygirl »

watchnerd wrote: Sat Oct 30, 2021 11:37 am
Ivygirl wrote: Sat Oct 30, 2021 11:32 am
Granted, physical real estate provides more diversification from stocks than a REIT index. But that could be a bad thing, right? Exposure to the downside of a particular property in a particular market. That's the kind of diversification I don't need.
Sure, diversification could mean 'doesn't do as well'.

Cash certainly doesn't do as well as most asset classes, most of the time, as it loses to inflation.

But that's not really the point of this thread.

This thread was asking, specifically, if REITs provide a cushion for stock market down turns.

And, perhaps unsurprisingly, as stocks, they really don't.

The better diversification from stock market risk is to own things that aren't stocks at all.
We are agreed that REITs are not the answer to the OP's original question. REITs will not likely provide a cushion for stock market downturns. Unless maybe there is a period of high inflation, or a flight to real assets from a bubble elsewhere, or a general disenchantment with big tech or big pharma stocks, or just a lot of un-homed money sloshing around that cannot be productively employed. Or unexpected prosperity arising from a rethinking of infrastructure and land use. REITs may show their difference then, and we may see their stripes standing out from the general gray of the rest of the herd. What do you think?
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 11:53 am REITs may show their difference then, and we may see their stripes standing out from the general gray of the rest of the herd. What do you think?
I think we would then see what Ben Felix and Larry Swedroe talk about, namely:

The factors of REITs can be captured via a mixture of approximately 60-66% small cap value and 33-40% corporate or high yield bonds.

If you want to tilt that way, you can do it by tilting with regular SCV and more bond risk.

The only unique thing REITs bring vs the above allocation is idiosyncratic risk of the real estate sector, which is uncompensated, i.e. not positively rewarded.

Have you watched the Ben Felix video?
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Re: REITs for diversification

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watchnerd wrote: Sat Oct 30, 2021 11:57 am
Ivygirl wrote: Sat Oct 30, 2021 11:53 am REITs may show their difference then, and we may see their stripes standing out from the general gray of the rest of the herd. What do you think?
I think we would then see what Ben Felix and Larry Swedroe talk about, namely:

The factors of REITs can be captured via a mixture of approximately 60-66% small cap value and 30-40% corporate or high yield bonds.

If you want to tilt that way, you can do it by tilting with regular SCV and more bond risk.

The only unique thing REITs bring vs the above allocation is idiosyncratic risk of the real estate sector, which is uncompensated, i.e. not positively rewarded.

Have you watched the Ben Felix video?
I have not watched the Ben Felix video.

I find it difficult to believe that the real estate sector does not compensate or reward its investors for its risk. How does it make so many wealthy people then?

I feel compensated and rewarded for owning VGSLX. Ownership in an index of real assets seems less risky to me than messing with high yield bonds. Aren't they high yield for a reason? Are we sure their reward compensates for their risk?
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 12:09 pm
I have not watched the Ben Felix video.

I find it difficult to believe that the real estate sector does not compensate or reward its investors for its risk. How does it make so many wealthy people then?
We don't really have much to talk about if you haven't watched the video or read Larry's article.
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Re: REITs for diversification

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watchnerd wrote: Sat Oct 30, 2021 12:20 pm
Ivygirl wrote: Sat Oct 30, 2021 12:09 pm
I have not watched the Ben Felix video.

I find it difficult to believe that the real estate sector does not compensate or reward its investors for its risk. How does it make so many wealthy people then?
We don't really have much to talk about if you haven't watched the video.
All wisdom is contained in this video? Or do you just want to disengage. It's OK if you've lost interest.
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 12:21 pm
All wisdom is contained in this video? Or do you just want to disengage. It's OK if you've lost interest.
No, I'm just too lazy to re-type the same points made in Larry's article and the Ben Felix video.

If you at least watch / read them, we can at least discuss from the same page about the merits of the arguments they're making.
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Re: REITs for diversification

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watchnerd wrote: Sat Oct 30, 2021 12:26 pm
Ivygirl wrote: Sat Oct 30, 2021 12:21 pm
All wisdom is contained in this video? Or do you just want to disengage. It's OK if you've lost interest.
No, I'm just too lazy to re-type the same points made in Larry's article and the Ben Felix video.

If you at least watch / read them, we can at least discuss from the same page about the merits of the arguments they're making.
I actually didn't agree to discuss the merits of the arguments of Mr. Swedroe and Mr. Felix. Doing so is not a precondition for discussing the OP's original question, about REITs and diversification.

It's possible to have approached this question from a direction which is not research, but observation and personal reflection. Of course no one is obliged to value my take on things. But this is a forum of many ideas and sometimes I can add things.
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Re: REITs for diversification

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Ivygirl wrote: Sat Oct 30, 2021 12:57 pm It's possible to have approached this question from a direction which is not research, but observation and personal reflection. Of course no one is obliged to value my take on things. But this is a forum of many ideas and sometimes I can add things.
I try to take a data-driven approach to my investments.

I'm not always successful in adhering to this philosophy, but I actually try not to invest based on observation and personal reflection.

Behavioral economics tells me that here are so many cognitive biases that I have as a human animal that pre-dispose me to make bad choices.

i.e. I don't trust my instincts or hunches or anecdotal insights or ability to forecast the future or anticipate long chains of consequences
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Re: REITs for diversification

Post by rockstar »

I have some VNQ and REET. Both did well this year so far. I like them as an alternative to equities. I don't think of them as a bond replacement.
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Re: REITs for diversification

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rockstar wrote: Sat Oct 30, 2021 7:43 pm I have some VNQ and REET. Both did well this year so far. I like them as an alternative to equities. I don't think of them as a bond replacement.
?

But....they *are* equities....

From VNQ description:

"Invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property."

REITs are already held at market weight in the Total Stock Market index.

You're not holding them as an alternative, you're just over-weighting that sector of equities.
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Re: REITs for diversification

Post by abuss368 »

rockstar wrote: Sat Oct 30, 2021 7:43 pm I have some VNQ and REET. Both did well this year so far. I like them as an alternative to equities. I don't think of them as a bond replacement.
In my opinion a REIT investor makes a serious mistake when they consider REITs as a bond substitute (often in the search for additional yield). REITs have dropped in the last couple of bear markets lower than Total Stock ( Great Recession and the Pandemic). The Tech Bubble in 2000 was different with REITs climbing.

I am glad you do not look at them as a Bond substitute!

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Re: REITs for diversification

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abuss368 wrote: Sat Oct 30, 2021 8:49 pm
rockstar wrote: Sat Oct 30, 2021 7:43 pm I have some VNQ and REET. Both did well this year so far. I like them as an alternative to equities. I don't think of them as a bond replacement.
In my opinion a REIT investor makes a serious mistake when they consider REITs as a bond substitute (often in the search for additional yield). REITs have dropped in the last couple of bear markets lower than Total Stock ( Great Recession and the Pandemic). The Tech Bubble in 2000 was different with REITs climbing.

I am glad you do not look at them as a Bond substitute!

Tony
+1

REITs as a unique sector fund/asset class, has its place in a portfolio and its best to understand them lest one have unrealistic expectations.
j :D
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Re: REITs for diversification

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watchnerd wrote: Sat Oct 30, 2021 11:57 am
Ivygirl wrote: Sat Oct 30, 2021 11:53 am REITs may show their difference then, and we may see their stripes standing out from the general gray of the rest of the herd. What do you think?
I think we would then see what Ben Felix and Larry Swedroe talk about, namely:

The factors of REITs can be captured via a mixture of approximately 60-66% small cap value and 33-40% corporate or high yield bonds.

If you want to tilt that way, you can do it by tilting with regular SCV and more bond risk.

The only unique thing REITs bring vs the above allocation is idiosyncratic risk of the real estate sector, which is uncompensated, i.e. not positively rewarded.

Have you watched the Ben Felix video?
I did watch the Ben Felix video and I found it quite informative. For new investors, I am neutral on REITs. When REIT funds came available, I bought in and found this asset class to be a great asset class to be in. Despite what I heard on the video, I am sticking with what I have but I have no plans to buy more. Don't have the enthusiasm for them that I used to have.

So why have I not sold my REIT investments? I have seen financial data change over time and also the recommendations made by the Academics. REITs were once great according to the Academics and now are nothing special. Data and opinions float over time. I am reluctant to constantly change my portfolio according to the latest and greatest research. Sometimes the best investment is what you already own and not what is on the cutting edge.

Not ignoring Felix or the Academics. Actually, I listened rather intensely and I summarized the video in a post in another thread. I also have expressed concern about valuations in many posts. But I decided to more or less stay the course, riding with what I had. Whatever changes I make in the portfolio are made slowly and over time and with a lot of thought beforehand.
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Re: REITs for diversification

Post by burritoLover »

It's funny - if you look at older investing books/articles/etc, say 10 years ago or so, a separate allocation to REITs were considered a key part of a portfolio. Now you see a lot fewer recommending them. Why is that?
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Re: REITs for diversification

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burritoLover wrote: Sun Oct 31, 2021 11:38 am It's funny - if you look at older investing books/articles/etc, say 10 years ago or so, a separate allocation to REITs were considered a key part of a portfolio. Now you see a lot fewer recommending them. Why is that?
I would love to say the research has clarified the attributes of REITs and whether they're an asset class or not, but I think the reality is pre-2008 real estate bubble "hotness" and post-2008 "hatred" explains most of it.

Financial advice is driven in part by marketing demands for what is 'hot'.

Commodities are another example of an asset class that was en vogue, but fell out.
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Re: REITs for diversification

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watchnerd wrote: Sun Oct 31, 2021 11:47 am
burritoLover wrote: Sun Oct 31, 2021 11:38 am It's funny - if you look at older investing books/articles/etc, say 10 years ago or so, a separate allocation to REITs were considered a key part of a portfolio. Now you see a lot fewer recommending them. Why is that?
I would love to say the research has clarified the attributes of REITs and whether they're an asset class or not, but I think the reality is pre-2008 real estate bubble "hotness" and post-2008 "hatred" explains most of it.

Financial advice is driven in part by marketing demands for what is 'hot'.

Commodities are another example of an asset class that was en vogue, but fell out.
Good point. Returns for REITs were 1.5+% higher than US total market from the bottom of the GFC through Jan 2020. So that was a poor time to move away from REITs - but, that usually is what happens when assets go out of favor - great times to buy if you can time it right.
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