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Originally Posted by pb4uski
What I've never been able to decide is whether I need/should have REITs in addition to the 4% real estate that is included in the stock market as a whole (in the Total Stock Market Index Fund), and if so, how much.
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Quote:
Originally Posted by Midpack
That's the main reason I own a REIT fund, typically low/negative correlation with other equity funds. I assume it's the reason many investors do, Dr B taught me...
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What Midpack says. When I was doing the Asset Allocation tutorial I looked up as much historical and return data as I could find. IIRC, the correlation between REITs and bonds differs slightly from that between equities and bonds, providing some diversification benefit and giving a smoother-riding, less volatile portfolio without much if any decrease in expected return from one with stocks & bonds only. The effect is pretty slight--my target AA is 70% bonds and the rest split evenly between stock and REIT, but I found that in practical terms there was very little difference in expected return and volatility between 5% stock/25% REIT and 25% stock/5% REIT. Last time I checked (which may have been over a year ago) I was approaching that 5% rebalancing trigger. I won't have access to that account info until I get my own computer out of storage and set back up, but I suspect rebalancing will be on my to-do list once that happens. I was also attracted by the fact that REITs generate some income, like dividend paying stocks. Yeah, I know, money is fungible, but I still find the idea of just spending my income and retaining the principal an attractive one. (added later) I may at some time want to move into a retirement community and at that point I would consider spending some of the principal for buy-in if sale of my house didn't generate enough money.
So to answer your question, if you want a slightly less volatile portfolio, add a dash of REIT fund. If you want the simplest portfolio, leave it out. I think you can get nearly the same effect by tweaking your stock/bond rebalancing point.