Adding REIT Fund

I've decided I really should include an REIT fund in my asset allocation for diversification. So I'll probably DCA into the VG REIT fund such that it will be about 2% of my total.

Now, I don't want to buy it now, since RE has gone up so much, but if I don't buy it, that would make me a dirty market timer, which is against my religion.

Any thoughts?

[wabmester]

Originally Posted by TromboneAl

Any thoughts?

Yes, change your religion.

I just looked at Vanguard's REIT viper, and the yield is around 4.2%. Significantly less that the risk-free rate of return. I don't know about you, but I want a risk premium for a risky asset.

[Lusitan]

I hold somewhere between 5 - 10% in a Vanguard REIT. So I think it's a good thing to have in your asset allocation.

That said, I think your gut instinct is correct that now is not the best time to add this component to your portfolio. Maybe double/triple your investment timeline so that even if you start getting in now, you do so in smaller bits each month than you normally would.

I had these same thoughts when I decided to mix a REIT into my allocation 3 years ago ...

[Maximillion]

HRP/NYSE.

[veritasophia]

Originally Posted by TromboneAl

Now, I don't want to buy it now, since RE has gone up so much, but if I don't buy it, that would make me a dirty market timer, which is against my religion.

Call me a filthy heathen but I'm not buying either. I'm new to all of this but a P/E ratio of 36.7 does not inspire wire transfers.

[LOL!]

I had the same dilemma last year. I wanted a REIT, but only in our retirement accounts. My spouse's company switched 401(k) plans and voila -- there was a REIT fund staring me in the face. So we exchanged all her S&P500 index fund into the REIT fund and watched it drop about 10% and waited. And waited. And waited.

And our wait was rewarded, it's up 35% since switching and 14% YTD.

Past performance is no guarantee of future results ... blah, blah, blah.

Since this will end up being only 2% of your asset allocation, what's with the DCA? Just do it.

[Cb]

I'm with you, Al. I'd like to own a REIT index, and I will eventually, but not jhust now. Here's a passage from The Thing I Wrote For My Wife on this type of "portfolio regret":

"Note: I think that one of the greater vulnerabilities we face has to do with incorporating additional asset classes over time.* Enthusiasm for a new (or old) asset class is never greater than at their peak valuations…by the time classes such as the REITs or Small Value indexes are recommended throughout the media (and internet boards) their prices have already moved up appreciably. It is a classic investor error to “chase performance” by buying in after prices have surged for a period of time.* My plan to avoid falling prey to this tendency by holding off on incorporating an additional asset class until a number of years after they come to my attention, just to see if they still make sense to me after the buzz has died down. (this is where I am with the REIT indexes mentioned above…I think we ought to own them, and expect to at some point in the future, but I sure wish I’d figured that out 5 years ago when few people were chatting them up.)

The way I look at it is this: We’re looking at a ~50 year investment window, and our current degree of diversification is probably around 90% of what is possible – so if we’re a few years late in adding a relatively small allocation (~10%) to a new asset class and thereby improving our diversification incrementally, the difference in our long-term results is pretty small. On the other hand, if we repeatedly jump on asset classes while they are at the peak of their popularity, I think we stand a greater risk of buying in at peak valuations and riding them downward. The enemy of a good plan is the search for the perfect plan.* A good plan will get the job done for us…constantly re-jiggering our portfolio in search of perfection is probably more apt to harm our long-term returns. "

Cb

[veritasophia]

Originally Posted by Cb

My plan to avoid falling prey to this tendency by holding off on incorporating an additional asset class until a number of years after they come to my attention, just to see if they still make sense to me after the buzz has died down.

Well put. This is exactly my thinking, if an asset class is on a pedestal I will shun it, but I'll take it home and feed it riches when everyone else is spitting on it.

However, doesn't waiting to buy until an asset is "on sale" reek of market timing? Uh Oh, we're back to Al's religious dogma .

[Cb]

Originally Posted by Veritasophia

However, doesn't waiting to buy until an asset is "on sale" reek of market timing?* Uh Oh, we're back to Al's religious dogma* .

Yeah, it does. But as I said in TTIWFMW "...On the other hand, if we repeatedly jump on asset classes while they are at the peak of their popularity, I think we stand a greater risk of buying in at peak valuations and riding them downward."

Cb
PS: this was going to be the year I finally bought into REITs.*

[LOL!]

Well, since we are only helping Al to allocate just a measly 2% of his money, how about the following:

On a day that Al's portfolio drops 1%, he buys half of his REIT allocation. He thinks to himself, "Well, today's drop is just as if I had lost 100% of my REIT fund if I had invested it earlier."

Then on the next day that Al's portfolio drops 1%, he buys the remaining half of his desired REIT allocation. He thinks to himself, "Why did I ever listen to those folks on the RE message board anyways?"

[Maximillion]

I hold a Mortgage Free Principal Residence, I feel my exposure to Real Estate is more than adequate, thus I prefer to buyothet income Trusts.

Most,if not all here, have Real Estate Exposure, it might be prudent to allocate assets to other areas of the economy,

Three times in the last two days I have raed the word Recession, the latestpredicting second half '06, not exactly best time to be adding REITS.

I am buying a Sugar Income Trust.

Ethanol.

[d]

Originally Posted by wab

I just looked at Vanguard's REIT viper, and the yield is around 4.2%. Significantly less that the risk-free rate of return. I don't know about you, but I want a risk premium for a risky asset.

Wose still: Vanguard notes that "The current adjusted effective yield is 3.42% as of 02/28/2006, which is the unadjusted yield reduced by an estimated return of capital."

[wabmester]

Originally Posted by Veritasophia

I'm new to all of this but a P/E ratio of 36.7 does not inspire wire transfers.

REITs can't be valued like stocks, so the P/E is pretty meaningless.* *In fact, "REIT" isn't very descriptive.* *It could be anything from a company that plays with interest rate spreads to a holder of shopping malls.

Personally, I'd value a REIT more like a very long-term bond.* * You're basically buying an income stream, and if there's underlying real estate generating the income, you're also buying the inflation protection of that income stream.

The days of hot money buying REITs and real estate for (anticipated) appreciation are probably over, so I think it's prudent to wait for a correction as hot money exits. Of course, this is dirty market timing.

[rogersteciak]

Adding real estate for diversification is a good idea.* Check out the National Association of Real Estate Investment Trusts (http://www.nareit.org/).* From the home page, you can navigate to the relative performance of REITs (http://www.investinreits.com/reasons/performance.cfm) and the diversification benefits of REITs (http://www.investinreits.com/reasons...sification.cfm).

The "real estate bubble" you hear about in the press is related to single family homes.* REITs invest primarily in commercial real estate (apartments, office buildings, warehouses, and so forth) rather than single family homes.* I don't know how to answer the timing issue (i.e., is now a good time to invest in REITs? or is it better to wait for a few years?).* But whether you invest in REITs now or later, it is always to good idea to come up to speed on the asset class so that you will be informed at the time you pull the trigger.

[mb]

Al,

I have always been kind of a Total Market Index guy but because of some of the current macro-economic factors I have recently been looking at other poorly correlated asset classes.

About two years ago I started DCAing into a REIT index fund. It was already up a bit at the time so I went through the same thought process that you are going through but decided to invest and now I'm happy with that decision. I got up to about 6%, sold a bit (it's in a tax deferred account) and I'm now at 5% and holding. Current plan is to keep it in the 5-8% range.

About 6 months ago I started DCAing into a Nat'l Resources Fund (mostly oils but some other stuff also) despite the run up in oil. I do believe that oil is a limited resource that will rise in value as it is depleted so I'm ok with it going down a bit in the short term. Other energy resources will replace it but in general they will be higher cost.

More recently I have been thinking about adding gold/precious metals exposure. Maybe something arough 3%. That is one of the reasons I started the recent gold topic. For gold I decided to wait and watch it a bit longer. Maybe learn a bit more? Unlike oil, I don't think that gold is really a necessary commodity in a modern economy. (Pt could be a different story?)

So I made opposite decisions for RE and nat'l resources compared to gold. The reason? For both RE and nat'l resources, I think there is a story that supports long term appreciation. Short term they could go down and long term they may still under perform the market but I'm ok with that because the correlation coefficient with the market is low so they add diversification and I think that the overall trend will be up so I'll keep a bit of them even if they appear over valued.

Gold? I just don't have a clue about it so for now it's on hold.

MB

[wildcat]

Wab wrote:

Personally, I'd value a REIT more like a very long-term bond. You're basically buying an income stream, and if there's underlying real estate generating the income, you're also buying the inflation protection of that income stream.

Absolutely correct in my opinion. In the mid-late 90s REITs were yielding 7-9% on avg, far from the 4% now. But if you are not a dirty market timer then I say add some REIT exposure and don't worry about it.

[astromeria]

Dividends and cash & bond yields are relatively low, too--but unlike REIT payouts, they're increasing a tad. Place yer bets--and pick a safe withdrawal rate. I have 5% REITs--wish I'd been bolder a few years ago. When I add a new asset class, I start by dipping in a toe (like my 1% VG Precious Metals fund that's now worth 1.5%).

[MJ]

My portfolio had nearly 50% of "REIT" until I recently sold my 2 fam house. I couldn't sell 50% of my property.

[cute fuzzy bunny]

If it helps, were I to be considering an investment in reits, now would not be the time I'd pick.

I just dumped my holdings a few months ago. Prices looked a little nutty then. They look even nuttier now.

Thanks guys. You convinced me, and I'll hold off and reevaluate in a few years.