contrarian portfolios?

[kevink]

After reading recent posts about investment returns for this year I found myself wondering if anyone else out there has gone in a diffferent direction as I have. Orignally a classic Vanguard-influenced stock/bond index fund investor, much reading of Scott Burns, Gillette Edmunds, etc. and a lot of soul-searching made me realize that (a) I'm more comfortable with asset classes other than stocks; and (b) owning 3-5 truly non-corrrelated asset classes seems to be key to long term returns one can live on (& U.S. stocks and bonds are quite correlated).

So, long story short, for the 3 of the past 5 years of ER have been about 50% bonds (TIPS and Total Bond Index), 30% REIT index funds, 20% oil and gas (Canadian royalty trusts plus Vanguard). 3 non-correlated asset classes, no stocks, YTD return 12.9%. Am well aware this portfolio is far out of the mainstream, and have to wonder if anyone else out there has departed this far from standard portfolios.

[yakers]

Hey, I like it. You have the 'hot stuff' in REITs and oil and a hedge/counter weight of TIPS and a total bond index (50% each?). You could get hit in a probable short term decline in REITs & oil but over time these are good sectors. My FIL made his entire fortune on one oil stock Atlantic/ARCO/BP over a long time frame.
Any normal advisor would suggest more diversity but you have 4 good classes (and maybe own your own home and some cash?). You have an interesting and possibly viable approach. This is more interesting than my various mostly index funds. I am not sure if your potential increaded payback is worth the increased risk with less diversity, maybe do a risk analysis?

[brewer12345]

Not to be a total Pedant, but REITs and energy are both stocks.

[CyclingInvestor]

I have about 87% of my investment $$s in top quality, individual
REIT stocks. I made this allocation in late 98, and am now 0-3 years
from retirement. I can easily live on these dividends, with a decent
margin of safety. The companies have raised their dividends around
5-10% each year (with a couple outliers), and all have been doing this
for 10-40 years. The other 13% is in some bonds, cash, and other stock
investments, designated as replacements for the REITs should they
run into difficulty.

I realize this strategy would compute as quite risky by most calculators,
but I do not care at all about stock prices, only the dividend flow and
growth (and the underlying management and business models).

[kevink]

Thanks for the interesting replies. I agree this portfolio is probably too concentrated and will doubtless put a modest % into Total Stock and Total International Indexes.

As for the comment about REITS and energy being stocks, they're not (though this would come as news to your standard mutual fund allocation tool. REITS are a separate asset class - they may trade like stocks, but they ain't (see Scott Burns' columns at www.scottburns.com, Gillette Edmunds "REITS for the New Decade," etc.

Oil and gas, including such royalty trusts, pipeline partnerships, etc. are also increasingly being viewed as a separate asset class. On the other hand, if you just buy energy funds (e.g Vanguard's, Fidelity's) they own pretty much just the big multinational companies like Shell, BP, etc., and the performance of these stocks is highly correlated to the U.S. stock market in general and S & P in particular, meaning you don't get diversification by buying them.

[brewer12345]

Quote:

Originally Posted by kevink Thanks for the interesting replies. I agree this portfolio is probably too concentrated and will doubtless put a modest % into Total Stock and Total International Indexes. As for the comment about REITS and energy being stocks, they're not (though this would come as news to your standard mutual fund allocation tool. REITS are a separate asset class - they may trade like stocks, but they ain't (see Scott Burns' columns at www.scottburns.com, Gillette Edmunds "REITS for the New Decade," etc. Oil and gas, including such royalty trusts, pipeline partnerships, etc. are also increasingly being viewed as a separate asset class. On the other hand, if you just buy energy funds (e.g Vanguard's, Fidelity's) they own pretty much just the big multinational companies like Shell, BP, etc., and the performance of these stocks is highly correlated to the U.S. stock market in general and S & P in particular, meaning you don't get diversification by buying them.

Bullflops. Pretty much every correlation study I have seen on REITs suggests that they trade much like small caps (which they generally are). As for energy trusts, pipelines, etc., the economics of the business will translate to the owners of that business no matter what structure you stuff it into. If you have the residual claim on an asset, you own an equity.

[lazyday]

Quote:

Originally Posted by kevink doubtless put a modest % into Total Stock and Total International Indexes.

If in a taxable account, you may want to verify if using total intl index causes you to lose the foreign tax credit. If it does (which I think I've read) then if the extra commission/fees aren't too bad, you might want to instead split that up into regions. For example, VGK, VPL, and VWO, which also have nice low E/Rs, compared to ishares or the regular Vngd mutual funds. Fidelity is even cheaper, at least for now. (They did make ER cut "permanent" but can always propose another change, and if shareholders refuse, they still have options.)

[kevink]

At the risk of beating a dead horse.....

"unlike stocks, REITS must payout all their profits as dividends and these dividends are deductible. With minor exceptions, REITS are restricted to real estate investing. Common stock companies can invest in any business, control their profits as they wish, but receive no tax deduction if they pay out profits as dividends.....

The performance of REITS differs from the performance of both real estate and common stocks......According to Morningstar, REIT mutual funds have an R-squared to the S & P 500 of less than 10. Small cap value stocks have an R-squared of around 45 as do emerging market stocks. There is essentially no correlation between the returns on REITS and common stocks."

-"REITS for the New Decade," by Gillette Edmunds

Much more information and discussion on REITS and energy & commodities as distiinct asset classes can be found on the Vanguard Diehards board and in Scott Burns' various well-known portfolios (at www.scottburns.com).

[preben]

Hmmm... something seems wrong here. small cap value and reits have a very close correlation in all studies I have seen. Reason why I hold reits and microcaps rather than retis and small value. Cheers!

[ESRBob]

Kevin,
if you really love these non-correlated assets like reits, have you considered owning a direct investment in a limited partnership that owns a small commercial building? We recently invested in a local office building that way and sold the REITs-- not as diversified as a REIT, of course, but actually pays a higher dividend and we have the upside (or downside) of owning a direct share in a building. You could do something similar with O&G partnerships etc. For what it's worth, though, my friends investing in pipeline royalty trusts say that those securities are not directly correlated with the price of energy, so you should think about them differently.

In general, I agree with the less-correlated asset classes portfolio. You've gone pretty far out on a limb, and had a good run in your commodiites, reits and energy in the past 5+ years -- not sure what the future has in store as the cycle turns...