Where do REIT's belong in asset allocation- under stocks or in a separate class?

[JK]

I'm working on revising my asset allocation and trying to figure out where REITs belong. I've seen some people lump them under their domestic stock allocation while other people put it under an alternatives/Real Estate section. Even WCI seemed to flip flop with that one based upon his old asset allocation and his new one.

https://www.whitecoatinvestor.com/the-new-wci-asset-allocation/

I was personally thinking of putting it under its own alternatives/real estate class (like WCI new portfolio and PoF). I was thinking 4 main categories: Domestic equity, international equity, Alternatives/Real estate, and fixed income/bonds.

Here is what I have:

1) Domestic Equity: 55%

VTSAX (TSM): 45%

VSIAX (SCV): 10%

2) International Equity: 25%

VTIAX (total intl): 25%

3) Alternatives: 10%

VGSLX (REIT): 10%

4) Fixed Income: 10%

VBTLX (total bond): 10%

 

[nachos31]

I think WCI flip flopped, as you say, because real estate became a much larger component of his portfolio and not just by way of REITs, but by all the various RE investments he detailed in his post today.

Honestly, as long as you know what's in your portfolio, it doesn't matter how you categorize it. Just know REITs act more equity-like (i.e. are volatile) like other "straight-up" equities and thus should not be in your bond/fixed income allocation.

How you've written your very reasonable allocation above works well. Your alternative could be:

1) Domestic Equity (65%)

- TSM 45%

- SCV 10%

- REIT 10%

One thing to keep in mind is that TSM and SCV both already contain some REIT (more so SCV) so if you only want 10% REIT overall it'd be good to factor in the TSM/SCV REIT contributions.

[The White Coat Investor]

Exactly. I decided to go from 7.5% to 20% real estate. REITs themselves went from 7.5% to 5%. But does it matter whether you call them real estate flavored stock or stock flavored real estate?

[Donnie]

I think they should be separated if the goal is to add assets that are less correlated with stocks.  REITs have become more correlated with stocks over the past decade or so, so I don't see a need to overweight this asset class more than what is found in the total stock market fund.

For WCI, I wouldn't include website/small business ownership in the real estate bucket (I think I read that you did that) since those assets have nothing to do with each other, but I guess you could just call it "other assets."

[The White Coat Investor]

Donnie wrote:

I think they should be separated if the goal is to add assets that are less correlated with stocks.  REITs have become more correlated with stocks over the past decade or so, so I don’t see a need to overweight this asset class more than what is found in the total stock market fund.

For WCI, I wouldn’t include website/small business ownership in the real estate bucket (I think I read that you did that) since those assets have nothing to do with each other, but I guess you could just call it “other assets.”

Click to expand...

Isn't it fun that I get to do whatever I want with my portfolio just like you do?

Seriously, I didn't have a separate bucket for them and I thought they made more sense there than anywhere else, so that's where they are.

Not overweighting REITs is reasonable. But don't kid yourself that you're somehow owning real estate at market weight by doing that. The vast majority of real estate is NOT publicly traded.

[Donnie]

The White Coat Investor wrote:

Donnie wrote:

I think they should be separated if the goal is to add assets that are less correlated with stocks.  REITs have become more correlated with stocks over the past decade or so, so I don’t see a need to overweight this asset class more than what is found in the total stock market fund.

For WCI, I wouldn’t include website/small business ownership in the real estate bucket (I think I read that you did that) since those assets have nothing to do with each other, but I guess you could just call it “other assets.”

Click to expand…

Isn’t it fun that I get to do whatever I want with my portfolio just like you do?

Seriously, I didn’t have a separate bucket for them and I thought they made more sense there than anywhere else, so that’s where they are.

Not overweighting REITs is reasonable. But don’t kid yourself that you’re somehow owning real estate at market weight by doing that. The vast majority of real estate is NOT publicly traded.

Click to expand...

Well that's the fun of being anonymous and not exposing my portfolio.  I don't have to defend myself from peanut gallery geniuses like me :P .

Lots of private businesses aren't in stock market index funds too.  I'd be fine if I didn't own any RE through index funds though.  I am already overweight RE through my home ownership.

[Ryan]

Usually the point of a bucket asset allocation strategy is to "manage" risk-- so it makes sense to categorize things according to their correlated risks. "Real estate" is a heterogeneous mix of investments to begin with. That said, I don't really know REITs, but last I checked, most prominent ones were trading 10-20% above NAV. Assuming they're always within 20% of NAV (above or below), they probably make most sense in the "real estate" bucket. Unlike other things in that bucket, they're very much more liquid, they take much less effort to hold, you lose many tax benefits, you have no managerial control, you lose leverage and you have virtually no risk beyond what you've invested (ie, nobody's probably going to sue you personally).