Should I rebalance to REITs in my Roth account?

[Phoenixdown99]

Hi there,

I just opened up my first taxable account and put 40K into the Vanguard Total Stock Market fund.

I know the stock market is really high right now, but I didn't want to sit out any longer. Also, I figured that if it drops this year that I can tax loss harvest.

Was wondering if I should re-balance some of my other accounts (mainly - should I convert my Roth to REIT, so that I have some kind of diversification buffer in case the market drops, which everyone is saying it will?) All of my retirement accounts (132K) and a 529 with 8K are in S&P500 index funds. My Roth is at 30K.

I also own a 550k rental condo with 200K paid off, at 3.3% interest on the mortgage. I don't think it is a good idea to pay that off right now. No other debt.

BTW I am 2 years out from residency, 33, single, currently renting in a HCOL area.

[hightower]

Well, the decision to add an REIT fund to your AA is yours.  Do you have a target asset allocation?  I own Vanguard REIT index fund shares in my portfolio, so personally I like it.  The prices of these shares are down right now, so if you're planning on adding an REIT fund now is a good time to do it.

[ajm184]

Work on an IPS:  https://www.whitecoatinvestor.com/how-to-write-an-investing-personal-statement/

Within your target asset allocation of the IPS a REIT could certainly be a part of your asset allocation.  I would also consider some type of international equity exposure, unless the 'total stock market' fund you referenced is some type of world total stock market fund.

[Ryan]

You already have $550k in real estate with the condo, which appears to be the majority of your net worth. Investing in REITs would worsen your diversification. And although the US equity market may be overvalued as a whole, nobody can accurately predict if or when it will prices will drop. Generally, if you invest regularly and re-balance according to your risk appetite, fluctuations in the stock market will have a chance to even out. But, nobody will blame you for looking for alternative investments in an exuberant market. Assuming you know the history and risks of those instruments down cold, that is. Somebody suggested foreign stocks in another thread, and referred to an article by an investment firm. Personally, I don't know enough about them to put more of our money there. But they're worth a closer look if you're truly unsatisfied with US equity right now.

[Phoenixdown99]

There is only 200K paid off on the condo, but I see your point

[Phoenixdown99]

No it is VTSAX, which is all US stock from what I understand

[Phoenixdown99]

I am not sure if switching an index fund in US stock to international stock really matters. Don't most international markets basically follow the US market?

[WallStreetPhysician]

Phoenixdown99 wrote:

Hi there,

I just opened up my first taxable account and put 40K into the Vanguard Total Stock Market fund.

I know the stock market is really high right now, but I didn’t want to sit out any longer. Also, I figured that if it drops this year that I can tax loss harvest.

Was wondering if I should re-balance some of my other accounts (mainly – should I convert my Roth to REIT, so that I have some kind of diversification buffer in case the market drops, which everyone is saying it will?) All of my retirement accounts (132K) and a 529 with 8K are in S&P500 index funds. My Roth is at 30K.

I also own a 550k rental condo with 200K paid off, at 3.3% interest on the mortgage. I don’t think it is a good idea to pay that off right now. No other debt.

BTW I am 2 years out from residency, 33, single, currently renting in a HCOL area.

Click to expand...

If you are concerned about a drop in the stock market, I would rather diversify into bonds rather than into REITs.

[Ryan]

Phoenixdown99 wrote:

There is only 200K paid off on the condo, but I see your point

Click to expand...

The $200k is your equity-- that's mostly irrelevant unless you'd ever seriously consider defaulting on the mortgage. Your asset allocation includes a $550k condo. Your liabilities include a $350k mortgage. As you pay off your mortgage, you reduce your liabilities, but your real estate exposure stays about the same (it does increase, yes, but only because liabilities as a whole have decreased).

[Ryan]

Phoenixdown99 wrote:

I am not sure if switching an index fund in US stock to international stock really matters. Don’t most international markets basically follow the US market?

Click to expand...

The cop-out answer is all these assets are tied together. The post I was referring to suggests that international markets are undervalued. I don't know enough about foreign stocks to comment more. But the bigger point I was trying to make is to stick to the time-tested, dead-simple, Bogleheads-approved, stocks/bonds "bucket"-allocation unless you're willing to learn a lot about other, more "exotic" asset classes and what they get you for the risk involved.

[notadoc]

150 portfolios better than yours:

https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/

Portfolio 26: The Three Fund Portfolio

1/3 Vanguard Total Stock Market Fund
1/3 Vanguard Total International Stock Market Fund
1/3 Vanguard Total Bond Market Fund

A favorite among the Bogleheads, the Three Fund portfolio gives you Total World plus Total Bond for 0.04% less per year!  Despite its popularity, you can see there is really nothing particularly special about this portfolio compared to the other 25 above it.  It is broadly diversified and low-cost, although is heavily weighted in large cap stocks, just like the overall US market.

Even though for me 1/3 international is a little much.  I'm at 20%.

[TheGipper]

It always strikes me how easy it is for "veterans" to give the advice of "stick with your AA"

As most of us are painfully aware, few are savvy enough to do this well (create an initial asset allocation or IPS) early in their career when they start investing.  This always begs the follow-up question "should I stick with my crappy investment plan or change it now that I think I am more informed?"  There is no good answer to this one.  Changing almost always introduces behavioral influences including recently bias that lower returns.

Once one becomes a little more educated, the urge once again pops up to tinker with one's AA.  The justifications are endless.  Again, usually a bad idea.

But by this logic, one could never change their AA.  So when I do, I always feel better about making changes by adding asset classes that are down, the longer the better, preferably 3 years+.  For example, now just might be the time to up your international exposure, value exposure, or REIT exposure, if you are fully convinced in the merits of doing so and ready to pour more money in if they continue to underperform.

Then again, this is why simple static portfolios usually win the day in the long run.

 

[Phoenixdown99]

The simplicity of the 3 fund portfolio does appeal to me. I'd like to get some bonds given that I just got a bunch of stock and I am worried about drop. Which one should I convert to Bond - 401Ks or Roth?

[WallStreetPhysician]

TheGipper wrote:

It always strikes me how easy it is for “veterans” to give the advice of “stick with your AA”

As most of us are painfully aware, few are savvy enough to do this well (create an initial asset allocation or IPS) early in their career when they start investing.  This always begs the follow-up question “should I stick with my crappy investment plan or change it now that I think I am more informed?”  There is no good answer to this one.  Changing almost always introduces behavioral influences including recently bias that lower returns.

Once one becomes a little more educated, the urge once again pops up to tinker with one’s AA.  The justifications are endless.  Again, usually a bad idea.

But by this logic, one could never change their AA.  So when I do, I always feel better about making changes by adding asset classes that are down, the longer the better, preferably 3 years+.  For example, now just might be the time to up your international exposure, value exposure, or REIT exposure, if you are fully convinced in the merits of doing so and ready to pour more money in if they continue to underperform.

Then again, this is why simple static portfolios usually win the day in the long run.

 

Click to expand...

Excellent points. The major asset allocation point that needs to be modulated over time due to personal preference is the stock/bond allocation. Some can handle a 90/10 (or more) stock/bond allocation, while others may want a 50/50 stock/bond allocation. You can't really know until you lose sleep with your AA during a bear market.

The domestic/international mix, small cap/value tilting, and REITs have no "right" answer and are prone to the biases you mention.

-WSP

[WallStreetPhysician]

Phoenixdown99 wrote:

The simplicity of the 3 fund portfolio does appeal to me. I’d like to get some bonds given that I just got a bunch of stock and I am worried about drop. Which one should I convert to Bond – 401Ks or Roth?

Click to expand...

Debatable - the general consensus is 401(k) because of the tax-inefficiency of bonds relative to stocks, but others (most notably WCI in this post) argue that bonds should go in taxable, because you want the highest-performing asset classes (i.e. stocks) to be in tax-advantaged accounts.

I personally put bonds in tax-advantaged accounts.

-WSP