REIT vs EM equity

[galeno]

#64 galeno
Dryer sheet aficionado

Join Date: Nov 2002
Location: Alajuela, Costa Rica
Posts: 41


I'm thinking about cutting back our equity from 65% to 60%. I'm also thinking of diversifying into a REIT for 5% of port vs overweighing EM equities by 5% because they are cheap.

The forward PE for the REIT = 38. The forward PE for the EM equities = 13.

Diversify with REIT or tactical rebalance with EM stocks?

 

[jimnjana]

Why not do both?

 

[galeno]

Right now our 65% equity portfolio looks like this: 15% Lg US + 15% Lg non-US Developed + 10% Lg EM + 10% Small US + 10% Small non-US Developed + 5% Lg US Dividend Stocks.

Choice 1 = 60% Stocks: 10% Lg US + 10% Lg non-US + 10% EM + 10% Sm US + 10% non-US + 5% Lg US Div + 5% REIT.

Choice 2 = 65% Stocks: 15% Lg US + 15% Lg non-US + 15% EM + 10% US Sm + 10% non-US Sm.

 

[Animorph]

I'm not sure there is any quantifiable reason to do either at this level of detail in the portfolio. I'd prefer to let Lg US cover Lg US Div, and get non-US Sm and REIT and even EM sm in there. That assumes that US value is covered in Lg US as well.

I have pretty much US/International/EM in large/small and growth/value, with REITs and natural resources added.

 

[veremchuka]

My crystal ball is as cloudy as yours. I will point out that REITs have had a good run whereas Emerging Markets have been sucking wind for a while. I think there's more potential in EM than REITs right now though both are interest rate sensitive. My REIT AA is just 3% so movig funds from it to EM is hardly worth it but I have been exchanging bond fund into EM in my roll over IRA.

 

[audreyh1]

I think they are both valid asset classes and it makes no sense to hold one instead of the other. Many people hold both which makes perfect sense.

As for timing among asset classes - I can't help you there. I hold a fixed asset allocation.

 

[target2019]

Right now our 65% equity portfolio looks like this: 15% Lg US + 15% Lg non-US Developed + 10% Lg EM + 10% Small US + 10% Small non-US Developed + 5% Lg US Dividend Stocks.

Choice 1 = 60% Stocks: 10% Lg US + 10% Lg non-US + 10% EM + 10% Sm US + 10% non-US + 5% Lg US Div + 5% REIT.

Choice 2 = 65% Stocks: 15% Lg US + 15% Lg non-US + 15% EM + 10% US Sm + 10% non-US Sm.

To answer your question:

I would go with Choice 1, and I do similar. I target 5% EM (401K provider) and 5% REIT (Vanguard).

I did cut equity back by approximately 5% (small/mid US), but went to fixed, as that was more in line with my plan to stick around 60% equity.

I am still working...

 

[photoguy]

This year I ended up rebalancing out of REIT and adding money to EM. US Reits were considered overvalued early this year (may still be the case) and I'd hesitate to add an asset class when valuations are high.

Another option is to keep your current portfolio and just reduce percentages by 1/13 for everything to go from 65% -> 60%.

 

[karluk]

#64 galeno
Dryer sheet aficionado

Join Date: Nov 2002
Location: Alajuela, Costa Rica
Posts: 41


I'm thinking about cutting back our equity from 65% to 60%. I'm also thinking of diversifying into a REIT for 5% of port vs overweighing EM equities by 5% because they are cheap.

The forward PE for the REIT = 38. The forward PE for the EM equities = 13.

Diversify with REIT or tactical rebalance with EM stocks?

You may very well be right that EM equities are cheap compared with REITs, but I feel it is only fair to point out that a side-by-side comparison of PE ratios is an EXTREMELY poor way to evaluate the two investments. The casual investor is likely to see the fact that REIT PEs are triple those of EM and conclude that they are grossly overvalued right now.

But it is easy to find articles on REITs that point out that they should not be evaluated based on PE ratios, unlike more traditional stock investments. Here is a sample article from investopedia:

If you try to estimate the value of a real estate investment trust (REIT), you will quickly find that traditional metrics like the earnings-per-share (EPS) ratio, growth, and the price-to-earnings (P/E) multiple do not apply.
...
These net income numbers, however, include depreciation expenses, which are significant line items. For most businesses, depreciation is an acceptable non-cash charge that allocates the cost of an investment made in a prior period. But real estate is different than most fixed-plant or equipment investments: property rarely loses value and often appreciates. Net income, a measure reduced by depreciation, is therefore an inferior gauge of performance. Therefore, REITs are instead judged by funds from operations (FFO), which excludes depreciation.

How To Assess A Real Estate Investment Trust (REIT)

 

[galeno]

@Karluk and others.

Thank you. I'm just pointing out that REITS are more expensive right now vs EM stocks.

When the markets crashed in Oct 2008, we were at 60% equities. In Jan 2009 I rebalanced our port to 70% stocks. We went to 65% equities in Oct 2012. We want to be at 60% sometime before 2018.

My question is do we want to stay at 65% adding to EM by selling equity dividends or go to our preferred 60% by selling 5% each of lg US and lg non-US and adding a relatively expensive REIT?

By 2018 we want to have choice 1. We've pretty much won the retirement game. Both my wife and I want to cruise thru the rest of our retirement on a 60/40 sailboat. We have until 12/31/17 to get to our ideal AA.

 

[karluk]

@Karluk and others.
Thank you. I'm just pointing out that REITS are more expensive right now vs EM stocks.

I guess I don't think that's what you're doing at all. All you've done in this thread is point out that REITS have a much higher PE ratio than EM equities. But since PE is an invalid way of evaluating REITs, you haven't actually made a case one way or the other as to whether REITs are more expensive than EM. You may be right, but the evidence for your conclusion is completely lacking.

 

[target2019]

The REITS I track (like O and HTA and HCP) are 60-80% off their yearly highs.
VWO is 10% off its 52-week high.
I would say REITs are cheaper...

 

[galeno]

People are SAYING REITS are expensive. I really don't know as this is the first time I'm considering a small REIT position in our portfolio

In our port, I KNOW that EM stocks are the cheapest sub-asset class we own. I just showed the forward PE of both.

The REIT I'm considering is SCHH. It has a SEC yield of 3.45%. It would be the sub-asset class with the highest yield in our port.

Too bad we'd have to share 30% of those dividends with the USA Treasury.

 

[karluk]

The REIT I'm considering is SCHH. It has a SEC yield of 3.45%. It would be the sub-asset class with the highest yield in our port.

Too bad we'd have to share 30% of those dividends with the USA Treasury.

If you aren't in position to buy SCHH in a tax-advantaged account and end up paying 30% in taxes on your dividends, I would say that's a good reason in itself to stay away from the investment.

 

[foxfirev5]

I hold an EM fund, a REIT Index Fund and Global ExUS REIT Index. They each serve a different function. The EM fund compliments my 401k holding of the Vanguard Developed Market Index, miniscule ER but no EM. I match the Total Int'l Market with EM at 20% or so of my Int'l holdings.
As the US REIT index got more expensive I switched my new Roth contributions to the Global EXUS fund.
The only tilt to my portfolio is the slight REIT bias for income and conservative growth long term.
In my mind the two options are apples and oranges with different reasons for holding.

 

[veremchuka]

I don't think you'll care for my reply but if you want REITs then buy them and hold them rebalancing to keep their AA at the level you want. Don't buy them or EM because they might be the next hot thing. Market timing is dangerous.

I have about an 2.7 or 2.5% REIT position inside the Vanguard Total Stock Market Index, that was the AA of that fund earlier this year and I assume it's pretty much the same now. So I hold approx 3% of my total port in the Vanguard REIT fund and with the Vanguard TSMI the REIT position is approx 5.5 to 6%, that's all the REITs I want to hold.

I'd like to buy more EM but my AA in international is a bit high so I'm hesitant to do so. Yeah I think the next hot thing will be EM cuz like the "dogs of the Dow" it's been down but that's being a dirty stinking market timer. I still may exchange some bond funds to EM but I haven't for months and I'm trying to resist the urge!


ETA while the Vg REIT fund AA % is correct re my total port AA, the VG TSMI AA % in REITs isn't adding ~ 2.5% to the total REIT AA of the port. I don't want to do the math but my AA in REITs via the TSMI is probably another 1% or so. I guess my total port REIT AA is ~ 3.5%. Sorry for the confusion.