Author Topic: Dummy question from novice investor  (Read 3101 times)

Credaholic

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Dummy question from novice investor
« on: June 29, 2015, 03:31:53 PM »
Our 401K plan changed at the beginning of the year, and I went through the options now available to us and put most in the closest thing to Vanguard's Total Market Index Fund that I could find, but I got cute and also put $10K into FRESX, Fidelity's Real Estate Investment Portfolio. Made this decision based on overall growth since inception and return in the previous year. Since buying it, it's lost 13.05%. Should I sell and  cut my losses and put in the total market fund? Or should I hang on and realize that 6 months is super short term on something I'd planned to let money sit for years in and I should just ride it out? I'm not investor savvy enough to know if I made a huge mistake or if this is probably just a temporary blip. I know none of you have crystal balls either, but I've already relied on a blog for my biggest investment strategy (VTSMX) so I'm not above asking strangers for advise!

johnny847

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Re: Dummy question from novice investor
« Reply #1 on: June 29, 2015, 03:37:44 PM »
What is your desired asset allocation? Do you have an Investment Policy Statement written up? (http://www.bogleheads.org/wiki/Investment_policy_statement)
Do you want to hold real estate?

It sounds to me that you didn't particularly want to hold real estate. You instead made the decision to buy FRESX based on past performance.

You should decide on whether you actually want to hold real estate for the long term in your portfolio, but do not let the poor recent performance of FRESX influence your decision. Unfortunately the latter part is essentially impossible. But it's important to try and do - do you believe that real estate in the long run is a good diversifier and gives you a return/risk ratio that you want? Or would you rather just stick with stocks?

Credaholic

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Re: Dummy question from novice investor
« Reply #2 on: June 29, 2015, 03:58:33 PM »
What is your desired asset allocation? Do you have an Investment Policy Statement written up? (http://www.bogleheads.org/wiki/Investment_policy_statement)
Do you want to hold real estate?

It sounds to me that you didn't particularly want to hold real estate. You instead made the decision to buy FRESX based on past performance.

You should decide on whether you actually want to hold real estate for the long term in your portfolio, but do not let the poor recent performance of FRESX influence your decision. Unfortunately the latter part is essentially impossible. But it's important to try and do - do you believe that real estate in the long run is a good diversifier and gives you a return/risk ratio that you want? Or would you rather just stick with stocks?

I guess you're right, holding real estate was also a factor. I was concerned about putting everything in one place, so attempting to diversify, and interested in owning real estate without the hassles of owning real estate. I don't really understand why this fund is going down the drain while my neighborhood becomes more unaffordable with every passing week, but I thought real estate was a pretty sound investment and now I just feel confused.

I am positive that the second I sell, this fund will start going back up. Murphy's Law! I'm trying really hard not to let the recent performance influence my decision, but it's getting harder and harder when everytime I check up on it (not daily by the way, trying hard not to even look every week) it's further and further down.

johnny847

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Re: Dummy question from novice investor
« Reply #3 on: June 29, 2015, 04:16:37 PM »
What is your desired asset allocation? Do you have an Investment Policy Statement written up? (http://www.bogleheads.org/wiki/Investment_policy_statement)
Do you want to hold real estate?

It sounds to me that you didn't particularly want to hold real estate. You instead made the decision to buy FRESX based on past performance.

You should decide on whether you actually want to hold real estate for the long term in your portfolio, but do not let the poor recent performance of FRESX influence your decision. Unfortunately the latter part is essentially impossible. But it's important to try and do - do you believe that real estate in the long run is a good diversifier and gives you a return/risk ratio that you want? Or would you rather just stick with stocks?

I guess you're right, holding real estate was also a factor. I was concerned about putting everything in one place, so attempting to diversify, and interested in owning real estate without the hassles of owning real estate. I don't really understand why this fund is going down the drain while my neighborhood becomes more unaffordable with every passing week, but I thought real estate was a pretty sound investment and now I just feel confused.

I am positive that the second I sell, this fund will start going back up. Murphy's Law! I'm trying really hard not to let the recent performance influence my decision, but it's getting harder and harder when everytime I check up on it (not daily by the way, trying hard not to even look every week) it's further and further down.

Ah so you do want to hold real estate. Unfortunately I don't have an answer for you as to why the fund is doing poorly. But I can say that your neighborhood becoming more expensive to live in every week has almost no effect on this fund. FRESX is diversified against real estate markets across the United States. Your neighborhood is barely a blip on the radar.

That being said, I think you should consider selling this fund in favor of a cheaper real estate fund, such as Vanguard's REIT index (VGSIX). It has a expense ratio of 0.26% whereas FRESX has an expense ratio of 0.8%. And many 401k's charge an additional fee on top of the underlying fund's fee so the expense is probably higher than that.
Now of course you may (probably) not have VGSIX available in your 401k. I'd try to get it in an IRA instead (don't hold VGSIX in a taxable, the dividends are mostly if not 100% non-qualified dividends, which do not get the favorable tax treatment that qualified dividends do). If you can't get it in an IRA for whatever reason (you don't have enough space in there to meet the $3k minimum, you don't have an IRA, etc.) then honestly I would seriously consider not holding real estate at all. An underlying fund expense ratio of 0.8% is really high. Assuming that VGSIX and FRESX get the same returns (not true of course but let's just assume), then over 30 years the difference in the final balance is 17.7%. Over 50 years, the difference is 31.2%

Also, I would do your own research as to whether real estate is a good diversifier. My admittedly primitive research into the matter concluded it did not. But definitely do not take my word for it.

forummm

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Re: Dummy question from novice investor
« Reply #4 on: June 29, 2015, 04:38:02 PM »
Vanguard's Total Stock Market Index already has REITs in it. And putting all your money into that fund isn't "putting it all in one place"--it's putting it into about 4000 highly diversified US stocks. You will get the market return.

Credaholic

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Re: Dummy question from novice investor
« Reply #5 on: June 29, 2015, 11:09:13 PM »
Vanguard's Total Stock Market Index already has REITs in it. And putting all your money into that fund isn't "putting it all in one place"--it's putting it into about 4000 highly diversified US stocks. You will get the market return.

That's the understanding I came to after allocating the investments, thanks for reiterating it. It's hard to remember when everyone says diversify that even though you're invested in just this one fund that you're actually still diversified!

forummm

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Re: Dummy question from novice investor
« Reply #6 on: June 30, 2015, 07:37:48 AM »
Vanguard's Total Stock Market Index already has REITs in it. And putting all your money into that fund isn't "putting it all in one place"--it's putting it into about 4000 highly diversified US stocks. You will get the market return.

That's the understanding I came to after allocating the investments, thanks for reiterating it. It's hard to remember when everyone says diversify that even though you're invested in just this one fund that you're actually still diversified!

The fund is diversified for you. That's one reason it's so popular. It's more diversified than if you bought 1000 different stocks yourself--and much cheaper and easier too.