Where to place REIT in asset allocation?

[joesxm3]

I am organizing my asset allocation into:

Cash, Bonds

Conservative Equities (index funds, managed funds, SPY etc.)

Risky Equities (aggressive growth stocks, ARKK etc.)

Currently I have the VNQ REIT ETF in the Conservative Equities group, but I am wondering if I should have it in the Cash, Bonds group.

Thanks.

 

[USGrant1962]

Not fixed income. REITs are, arguably, a different class - real estate. See Rick Ferri's Core Four, for example. But they are much closer to equities than Fixed Income due to their fluctuating share prices.

 

[audreyh1]

REITs are stocks. They are interest rate sensitive like utility stocks, but also economic growth sensitive.

 

[Montecfo]

REITS are equities.

 

[gcgang]

https://www.guggenheiminvestments.c...interactive-tools/asset-class-correlation-map

While correlations change depending on the time period, in the past decade REITs have had a 0.70 correlation to S&P500, while only 0.38 to Bonds. I think the S&P correlation was lower in the previous decade.

Put ‘em in Equities.

 

[Closet_Gamer]

I treat them as a seperate asset class.

And stash them in tax deferred accounts.

 

[joesxm3]

Thanks.

In my main sheet I have REIT in its own class, but for this newer rebalancing target sheet I will leave them where they are.

 

[target2019]

Vanguard assigns VNQ a risk level of 4 out of 5.

 

[Montecfo]

I treat them as a seperate asset class.

And stash them in tax deferred accounts.

They are in my taxable in order to get the QBI deduction.

 

[OldShooter]

In the reading I have done, real estate is considered to be an "Alternative" investment and, because of this, REITs get classified as Alternative. This is also true of brokerage portfolio analyses that I have seen.

That said, I consider REITs to be just another equity mutual fund and that is what I suggest to my Adult-Ed investment class students. The main reason for this is that REITs are a very minor part of our portfolio, just whatever % they are of a total market fund, so I see no benefit to keeping track of them separately.

If we had a significant real estate component to our portfolio then I would lump REITs with that and keep track of an "Alternative Investment" tranche. I don't foresee this happening though.

But hey, @joesxm3, it's your portfolio and there are no portfolio police to tell you how to organize it. Do whatever works for you.

 

[capjak]

Since almost all the dividends capital gains are taxed as ordinary income (small precent is qualified) for VNQ, it is tax inefficient and should

FOR MOST

investors be in a tax deferred or tax free account.

 

[gcgang]

In the reading I have done, real estate is considered to be an "Alternative" investment and, because of this, REITs get classified as Alternative. This is also true of brokerage portfolio analyses that I have seen.

That said, I consider REITs to be just another equity mutual fund and that is what I suggest to my Adult-Ed investment class students. The main reason for this is that REITs are a very minor part of our portfolio, just whatever % they are of a total market fund, so I see no benefit to keeping track of them separately.

If we had a significant real estate component to our portfolio then I would lump REITs with that and keep track of an "Alternative Investment" tranche. I don't foresee this happening though.

But hey, @joesxm3, it's your portfolio and there are no portfolio police to tell you how to organize it. Do whatever works for you.

FWIW, I own a lot of individual stocks. I throw the REITS into my “Alternatives” asset class, along with gold and commodity related (BHP, RIO, FCX, etc). Thinking maybe I should move Energy holdings to this as they make up such a small % of S&P and are commodity related. REITS, Materials and Energy a couple years ago, while having their own S&P Sectors/Industries, each were only about 2.5%.

But except for the gold etfs, they’re all Equities, and in my simple AA sheet I classify them as such.

As Shooter says, do what works for you.

 

[target2019]

In our taxable brokerage,
$10,000 of ordinary dividends would cost us an additional $1,200 in tax.
$10,000 of qualified dividends would cost us an additional $0.00 in tax.

The actual situation is not that extreme, as there are also Section 199A dividends for a QBI deduction.

All of this is just to identify how taxes compare, and doesn't speak to the original risk question, and how to classify VNQ given the categories:

Cash, Bonds
Conservative Equities (index funds, managed funds, SPY etc.)
Risky Equities (aggressive growth stocks, ARKK etc.)

What I do know is that Vanguard gives VNQ a 4 out of 5 risk level, same as VOO (S&P 500).

 

[joesxm3]

I guess Vanguard and I have a different idea of risky. But they are including cash and bonds in their scale.

I think of SPX as safe and ARKK, SQ and bitcoin miners as risky. And they have lived up to my expectations

 

[steelyman]

I categorize REITs as half stock, half bond for asset allocation. It keeps it simple.

 

[target2019]

I guess Vanguard and I have a different idea of risky. But they are including cash and bonds in their scale.

I think of SPX as safe and ARKK, SQ and bitcoin miners as risky. And they have lived up to my expectations

Vanguard has this loaded into the popup.

Conservative funds Risk level 1
Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio or for investors with short-term investment horizons (3 years or less).

Conservative to moderate funds Risk level 2
Vanguard funds classified as conservative to moderate are subject to low to moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (4 to 10 years).

Moderate funds Risk level 3
Vanguard funds classified as moderate are subject to a moderate degree of fluctuation in share prices. In general, such funds may be appropriate for investors who have a relatively long-term investment horizon (more than 5 years).

Moderate to aggressive funds Risk level 4
Vanguard funds classified as moderate to aggressive are broadly diversified but are subject to wide fluctuations in share prices because they hold virtually all of their assets in common stocks. These funds may be appropriate for investors who have a long-term investment horizon (10 years or longer).

Aggressive funds Risk level 5
Vanguard funds classified as aggressive are subject to extremely wide fluctuations in share prices. These funds may be appropriate for investors who have a long-term investment horizon (10 years or longer). The unusually high volatility associated with these funds may stem from a number of strategies.

I'd probably give VNQ a 4.5.

 

[RetMD21]

Cash, Bonds
Conservative Equities (index funds, managed funds, SPY etc.)
Risky Equities (aggressive growth stocks, ARKK etc.)

Is this a recognized classification system? I don't see the utility.

 

[Midpack]

Always been recommended for tax deferred/free.

 

[joesxm3]

Is this a recognized classification system? I don't see the utility.

The only utility is to give me visibility as I shift from a 20% equity allocation to a 50%. I want to be able to know if I am getting too deep into the casino.

 

[target2019]

The only utility is to give me visibility as I shift from a 20% equity allocation to a 50%. I want to be able to know if I am getting too deep into the casino.

What you're doing makes sense. Some may be confused that you have 3 categories. Some institutions use 5, others 7, etc. Since this is about your analysis of your holdings, it is what you say it is.


Going from 20 to 50% equities makes sense too. Side story is my in-laws. She was as conservative as they come. 20% target in their managed account. In a period of low inflation and low interest rates that worked. If she were here today, though, watching that 80% in bond funds drop would really upset her.

For me the ultimate lesson comes from Wellington Management. 35% equity (VWIAX) is a better, average target. We use 50% as our target and will let that drift up to 60-70% if it can.

 

[RetMD21]

As others have said the REITs are equities and need to be included in that. I don't think that dichotomizing equities is useful. Although there is a spectrum they are all risky IMO.

 

[38Chevy454]

I agree that REITs are kind of like a 4th category to the stocks/fixed/cash typical allocation discussion. I do not think they are same as equities, as they do not have the same influencers, and they have different tax treatment. Also do not think REITs are completely fixed income either as their income can change and not influenced by pure interest rates alone. Especially depending on the type of real estate the specific REIT is invested in. REITs can mess you up in a taxable account since they are required to pay out each year and can cause some taxable income that you might not have planned for. In a pretax account this is not an issue. All that said, I do think that REITs are probably closer to stocks than bonds. But really they are more of a 4th category.

 

[sengsational]

I have a "hard assets" class, and that's where REITs go. For quick reporting here, I lump that asset class with equities, but when it comes to targets, hard assets has it's own target.

 

[Bikechuck]

I agree that REITs are kind of like a 4th category to the stocks/fixed/cash typical allocation discussion. I do not think they are same as equities,

f you own a total stock market fund such as Vanguard's VTSAX or a similar fund from Schwab or Fidelity they include REITS. So all of the major investment firms consider REITs to be equities which they in fact are.