Gyroscopic Investing

In a recent portfolio update letter, Jeffrey Saut from Raymond James stated:
"When I entered this business, some 40 years ago, one of my mentors told me to put 20% of my money into Treasury Bills, 20% into stocks, 20% into bonds, 20% into precious metals, and 20% into real estate. Clearly I have not followed that advice, although vetting it over a long-cycle shows it has a pretty decent track record."

Here is a link to his research note on portfolio allocation:
http://r20.rs6.net/tn.jsp?et=1103583716 ... OElaTIj1zq

Here's another commentator's article

http://randomroger.blogspot.com/2010/08 ... ee_22.html

Although Browne was not an advocate for real estate, I often thought that some real estate exposure in a portfolio via a REIT index would not be that bad of an idea. It has aspects of a hard asset, but also has an income stream. An Argentinian blogger FerFal, who wrote about his first-hand experience in the Argentina currency crisis in 2001, advocates owning both gold/precious metals and real estate. The real estate really helped him out when the Peso went south.

https://web.archive.org/web/20160324133 ... al-estate/

From 1972-2010 YTD the two portfolios performed with the following CAGR

25% Split: 9.48%  Std. Dev. 8.07%
20% Split w/REITS: 10.13% Std. Dev. 8.22%

Standard Deviation between them was about the same. The REIT addition had less drawdown in the worst year for the 25% split (-2.15% vs. -4.13%). However the REIT split had a drawdown of -7.98% in 2008 during the real estate crash. Still not too bad however. If someone wanted a reasonable choice for their Variable Portfolio a REIT index wouldn't be a terrible idea.

Real Estate . . .

Well, when you add a home to your portfolio, you are probably way over 25% in real estate.

I purchased 5 rental houses cheaply in 1998-1999 during the stock market bubble and luckily sold two of them at a nice profit to pay down the debt on the other three.  Hind sight is 20/20, but if I would have read Harry's book earlier . . . I would have sold them all.  So now my plan is to sell another rental property when one becomes vacant and use the proceeds to pay off the debt on the remaining two.

I am not comfortable investing in REITs.  I've seen too much wasted capital on REIT properties. I like my real estate like Harry liked his gold, under my control.

So my investments are 4x25 PP plus being overweight real estate.  Any one want to buy a property? LOL

PP4me wrote: Real Estate . . .

Well, when you add a home to your portfolio, you are probably way over 25% in real estate.

I purchased 5 rental houses cheaply in 1998-1999 during the stock market bubble and luckily sold two of them at a nice profit to pay down the debt on the other three.  Hind sight is 20/20, but if I would have read Harry's book earlier . . . I would have sold them all.  So now my plan is to sell another rental property when one becomes vacant and use the proceeds to pay off the debt on the remaining two.

I am not comfortable investing in REITs.  I've seen too much wasted capital on REIT properties. I like my real estate like Harry liked his gold, under my control.

So my investments are 4x25 PP plus being overweight real estate.  Any one want to buy a property? LOL

Yes I should have clarified that owning a home likely gives most people a lot of real estate exposure. As for REITs, I agree there are wasteful ones in existence which is a reason to index. I think that TIAA's real estate fund is unique in that they do own actual property underneath it and are not into crazy speculation. Problem is you need to be eligible to invest.

If someone wanted to own real estate units directly, they should make sure they have the personality for it. Either that or maybe get a reliable management company to handle things.

I posted my Top 10 List why REITs are better than direct Real Estate Ownership on the Bogleheads site a couple years ago:

Reasons to own index funds for real estate exposure vs. direct ownership:

1) Index funds don't call you at 3AM complaining about the plumbing.
2) Index funds don't sue you when they slip and fall on a broken sidewalk.
3) Index funds don't trash your place after you try to evict them.
4) Index funds don't use the court system to squat in your home after not paying rent.
5) Index funds don't engage in criminal activity from your home.
6) Index funds don't pick up and move out in the middle of the night stiffing you with large rent due and damages.
7) Index funds pay you dividends constantly without having to place ads looking for new tenants.
8 ) Index funds don't get the cops called on them by the neighbors for causing problems.
9) Index funds don't need criminal background checks.
10) Index funds don't write bad checks.

Overall though I still recommend the core portfolio be the 25% split. It's important to also recognize that the stock market index has a large amount of real estate exposure. Not just in REITs which publicly trade, but the companies themselves often own their own property. These factors all roll into the stock value.

Yes, I've experienced all 10 of your pitfalls! I don't like hiring a manager for the property because they rent their properties first and use your properties for the overflow.  Your property will sit vacant with a management company. 

If you can't do the maintenance and the management, Do Not Buy Rental Properties. Harry was right again, just do a 4x25 portfolio!

craigr wrote: Although Browne was not an advocate for real estate, I often thought that some real estate exposure in a portfolio via a REIT index would not be that bad of an idea. It has aspects of a hard asset, but also has an income stream. An Argentinian blogger FerFal, who wrote about his first-hand experience in the Argentina currency crisis in 2001, advocates owning both gold/precious metals and real estate. The real estate really helped him out when the Peso went south.

https://web.archive.org/web/20160324133 ... al-estate/

I took a look at this guy's website and here is one quote I really like: "Don't invest all your money in your country".  This is in a sense why HB recommended that you store some gold overseas.  Jim Rodgers recommends that you have a foreign bank account.  My only trepidation about the PP is the SHTF scenario, as occurred in Argentina.  For this reason I think it prudent to use the VP to hold foreign assets of various types.