Adding REITs/SCV to the Stock Portion? (in excess of TSM weightings)
Posted: Wed Aug 17, 2011 7:15 pm
What's the consensus on adding REITs to the stock portion? It's included in TSM albeit to very little numbers. Something around 0.5% I believe.
I was initially against including REITs because I wanted a simple portfolio (PP) and for stocks I just did a 50-50 split between VG TSM and VG Total International Stock fund. The theory being that I can easily take my stock allocation, divide it in two, and know how much of each to have without any math. Also, I can rebalance internally within the stock portion, when I do an overall rebalance, by shifting from the "winning" side into the "losing" side.
I know HB was against international stocks for currency issues, but I feel strongly in them.
As it turns out, I've made a very complex PP using instruments such as I-Bonds, a small annuity, and NCUA (the credit union version of FDIC) HSA as a modest portion of the "cash" allocation to juice returns while increasing tax-advantaged space (since I-Bonds, HSAs, and Annuities are all tax-advantaged, I would be forgoing the tax-benefit by excluding them from my PP, or if I held them separately from the PP, I would be overweight in cash, on an overall portfolio basis).
Thus, if things are going to be complex anyway, and I need to bust out excel, might as well juice my stock portion, with some REITs (and maybe a small portion of SCV).
My thinking is this:
Stock portion makes up 25% of the PP; within that:
10% Domestic TSM
10% International Stock Market fund
2.5% US REITs
2.5% International REITs
Note that I am putting this in terms of the overall PP, rather than as a portion of the stock side only. I did this because of the "rule of thumb" that anything less than 5% of your overall Portfolio won't do much either way. If that 5% happens to have 100% growth, you only grew the portfolio by 5%. Woopty do. Investing in less than 5% makes things negligible.
Thus, if I do include REITs, then the aggregate of US and International REITs should be 5% of the overall Portfolio. It would make them be 20% of the stock assets.
I believe REITs add a higher level of diversification to the portfolio, and I believe REITs have stronger moves to the economy. Thus, if stocks would normally do X% gains/losses, REITs might do 1.5X or 2X. Since the PP really makes its money through rebalancing out of winners and into losers (buy low, sell high), the more motion in the Stock portion, the better overall return, albeit at the expense of slightly higher standard deviation.
I believe many of HB's objections to REITs were based on the mediums available to invest in them during most of his life. Any comments either way on implementing REITs? Should it be done in a Variable Portfolio only?
With respect to SCV, I would do it in place of REITs in the model above, putting 5% of the total portfolio into SCV, or I might do both SCV and REITs such as:
7.5% US TSM
2.5% US SCV
7.5% International Index
2.5% International SCV (or just SC since VG doesnt offer SCV)
5% REITs (split between US and International)
I was initially against including REITs because I wanted a simple portfolio (PP) and for stocks I just did a 50-50 split between VG TSM and VG Total International Stock fund. The theory being that I can easily take my stock allocation, divide it in two, and know how much of each to have without any math. Also, I can rebalance internally within the stock portion, when I do an overall rebalance, by shifting from the "winning" side into the "losing" side.
I know HB was against international stocks for currency issues, but I feel strongly in them.
As it turns out, I've made a very complex PP using instruments such as I-Bonds, a small annuity, and NCUA (the credit union version of FDIC) HSA as a modest portion of the "cash" allocation to juice returns while increasing tax-advantaged space (since I-Bonds, HSAs, and Annuities are all tax-advantaged, I would be forgoing the tax-benefit by excluding them from my PP, or if I held them separately from the PP, I would be overweight in cash, on an overall portfolio basis).
Thus, if things are going to be complex anyway, and I need to bust out excel, might as well juice my stock portion, with some REITs (and maybe a small portion of SCV).
My thinking is this:
Stock portion makes up 25% of the PP; within that:
10% Domestic TSM
10% International Stock Market fund
2.5% US REITs
2.5% International REITs
Note that I am putting this in terms of the overall PP, rather than as a portion of the stock side only. I did this because of the "rule of thumb" that anything less than 5% of your overall Portfolio won't do much either way. If that 5% happens to have 100% growth, you only grew the portfolio by 5%. Woopty do. Investing in less than 5% makes things negligible.
Thus, if I do include REITs, then the aggregate of US and International REITs should be 5% of the overall Portfolio. It would make them be 20% of the stock assets.
I believe REITs add a higher level of diversification to the portfolio, and I believe REITs have stronger moves to the economy. Thus, if stocks would normally do X% gains/losses, REITs might do 1.5X or 2X. Since the PP really makes its money through rebalancing out of winners and into losers (buy low, sell high), the more motion in the Stock portion, the better overall return, albeit at the expense of slightly higher standard deviation.
I believe many of HB's objections to REITs were based on the mediums available to invest in them during most of his life. Any comments either way on implementing REITs? Should it be done in a Variable Portfolio only?
With respect to SCV, I would do it in place of REITs in the model above, putting 5% of the total portfolio into SCV, or I might do both SCV and REITs such as:
7.5% US TSM
2.5% US SCV
7.5% International Index
2.5% International SCV (or just SC since VG doesnt offer SCV)
5% REITs (split between US and International)
