Gyroscopic Investing

Hello,

I'm new to the forum, and as my name suggests I live in Europe (Belgium more specifically).
I'm thinking of adding real estate to my Permanent portfolio and I see two options:
1) In a 5 X 20 allocation (real estate, stocks, long bonds, short bonds, gold).  In a back-test this would boost the PP's return between 1,5 and 2% over the last decade
2) as part of the stocks-division in a 4 x 25 allocation where stocks would the consist of 50% index tracking and 50% pure real estate. This would still boost the PP's return up a little below 1% over the last decade and as well would it take out some volatility and all of the negative years. The european PP counted 3 negative years over the last decade.

Also, over the last 30 years we've seen a consistent growth in real estate in Belgium (explosion last decade) with only two dips, of which the 1983 dip of around 15% was the biggest of all.
I fear a Japan-scenario however with constantly declining real estate prices that could push an already weak performing PP further down and even make it go below zero.

In both cases, when the stock-market is soaring, the real estate will probably have a negative impact on the PP's return, I don't expect to see house prices so up 20% or more in one year as stock markets can do.

What do you guys think? Would it be a good idea? It seems that, in our country, with a bad stock-market, there is a certain flight to real estate as a 'safe haven', a bit like gold. That's my perception anyways. In that respect it could make sense to make it part of a PP, maybe even in 5 x 20 format.

Like to hear your opinions.

EuroPP

Personally, I wouldn't risk it.  I think Harry Browne recommended against chasing returns by buying asset classes that have done well in the recent past.  Since real estate has done well for the last 10 years, there is a good chance that it is overvalued and might perform poorly for the next 10 years.

If you are going to do it, I would back test for a much longer period of time; 30-40 years.

If you want to tilt that heavily to real estate I'd do it with your variable portfolio money - the money you can afford to lose. Real estate (as you point out) can lag the markets for a long time. Also it does not really have the growth of stocks. A long term study of real estate in Amsterdam if I recall (going back centuries using the Dutch records) showed that real estate barely beats out inflation. Being a "hard asset" like gold this doesn't surprise me. It will go up and down but the long haul I find it unlikely it's going to beat the stocks it replaces. Just my opinion.

You didn't state how you were going to invest in real estate. If it's physical property then it is a very illiquid investment with other risks (bad renters, etc.). If you are going to use a REIT then it is more liquid and you can diversify your holdings more easily. They also generate a good income stream from operations if you need it.

Also keep in mind that many companies have significant exposure to real estate through their own operations and as a stock holder you also take on that real estate risk. Companies need to buy land for factories, build out manufacturing and distribution, build out stores, etc. Also many REIT companies themselves are included in broad stock market funds. So even though you might think you have little real estate exposure, you actually have quite a bit just in the stocks.

You could say it's a kind of REIT. Actually it's a specific kind of companies invested solely in specific kinds of real estate (commercial, residential, warehousing, offices) who's value consists of the value of the property they own and whose dividends are composed of the rent they collect, easily said. More, in belgium the dividends on such companies are very favorably taxed, ranging from 0% to 15% depending on the kind of real estate the invest in. They're also obliged to put 80% of income in the dividends... this garanties a good income stream whith these stocks.

EuroPP wrote: You could say it's a kind of REIT. Actually it's a specific kind of companies invested solely in specific kinds of real estate (commercial, residential, warehousing, offices) who's value consists of the value of the property they own and whose dividends are composed of the rent they collect, easily said. More, in belgium the dividends on such companies are very favorably taxed, ranging from 0% to 15% depending on the kind of real estate the invest in. They're also obliged to put 80% of income in the dividends... this garanties a good income stream whith these stocks.

If you think this is a reasonable bet then by all means count it as part of your Variable Portfolio. Just split your money 80% Permanent Portfolio and 20% Variable. The Variable will be your real estate money.

I'm not as opposed to REIT investing as Browne was. I understand that the income stream from companies that own shopping centers, office buildings, etc. is very powerful at times. But I would still include it outside the core portfolio. But REITs are about as close to real estate as I get. Outside of my own home, I don't really want to mess with real estate on the landlord level. I don't have the personality for it. But if other people do and enjoy it then carry on and prosper!

Seems good advice. mixing stocks with real estate can indeed compromise the stock-performance in good markets. That could be bad for my PP so I agree, probably better to keep it outside.