Author Topic: Rate of Return on Everything: A 150-year History  (Read 3108 times)

SeattleCPA

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Re: Rate of Return on Everything: A 150-year History
« Reply #50 on: February 08, 2018, 10:20:27 AM »
DNA2RNA my post was not specifically directed to you. I was merely trying to show that REITs are correlated to equities. From the OP:

The other thing, really interesting to anybody who tries to employ modern portfolio theory to their investing, is that it looks like housing and equities are not very correlated.

It has been suggested that REITs could take the place of bonds in a portfolio and I was trying to point out that this is not the case.

Sorry for lack of clarity or poor writing... but just so there's not confusion about what I meant to say, I never thought or intended to say that REITs are uncorrelated to something like US stocks or international stocks. (I think the probably are less correlated than other stuff because Portfolio Visualizers says so... but not that much.)

It's direct residential real estate that displays low correlation and has in most countries for decades. That's the statistic that piques interest if one wants to apply MPT to your portfolio.
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Kalergie

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Re: Rate of Return on Everything: A 150-year History
« Reply #51 on: February 14, 2018, 04:12:13 AM »
I'd like to pick this thread up as this is a really interesting topic for me. I personally have never invested in any type of real estate at all.

I believe real estate is not for everyone (not for me anyway). I don't like to be a landlord, I don't like to leverage at all, and I don't like the "hey landlord, this is your tenant. My toilette is broken, I don't care it's christmas eve! Come now and fix it or I withhold rent!"-kind of engagement that real estate usually entails.

However, I like to have a piece of the cake somehow. Currently my portfolio consists only of US and Int'l. index funds which do have REITs in them (about 3-4%). But the whole reason I hold the entire world in index funds is that I wanted to own the world. My understanding of this 150 year study is that real estate should be a heavy part of a world-portfolio to represent real weighing of wealth. Did I get this right?

Now how can I achieve this reasonably without holding physical real estate as commodity? Is being heavy on international REITs the answer?

Somehow isn't this the same as saying that you believe in Gold as a holding therefore buy mining companies? My gut feeling says this is the same fallacy.

What do you guys think?


 
« Last Edit: February 14, 2018, 04:14:35 AM by Kalergie »

brooklynguy

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Re: Rate of Return on Everything: A 150-year History
« Reply #52 on: February 14, 2018, 01:37:44 PM »
But the whole reason I hold the entire world in index funds is that I wanted to own the world. My understanding of this 150 year study is that real estate should be a heavy part of a world-portfolio to represent real weighing of wealth. Did I get this right?

If your goal is truly to own a portfolio of assets that proportionately mirrors the actual allocation of worldwide "wealth," then yes, real estate should be a significant fraction of your portfolio.  But query whether that is in fact your goal.  As you noted, if it were, then you would also need to diversify your portfolio into a multitude of other asset classes presumably underrepresented in your current portfolio, potentially including (depending on how you set the parameters for "wealth") not only gold and other precious metals but also livestock, artwork, timber, pork bellies and various other asset categories too numerous to count.

Occasionally, someone will make the argument that the logic underlying a passive investment approach in the selection of individual assets within a specific asset category should be extended to the selection of asset categories at higher levels of generality, but that logic does not necessarily apply in the context of the latter.  I personally employ a passive investment approach in the selection of individual stocks within a geographic market (via purchasing broad stock market index funds in lieu of individual stocks), but I employ an active investment approach in the selection of general asset classes and subclasses in which to invest in the first place.  Compared to the actual global allocation of investable assets, my portfolio's allocation deliberately overweights U.S. stocks relative to non-U.S. stocks, and deliberately overweights, by an extreme margin, stocks in general relative to all other asset classes.

Kalergie

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Re: Rate of Return on Everything: A 150-year History
« Reply #53 on: February 17, 2018, 02:43:40 AM »
Thanks Brooklunguy.
Would you mind elaborating on this? How exactly do you do this?
I personally employ a passive investment approach in the selection of individual stocks within a geographic market (via purchasing broad stock market index funds in lieu of individual stocks), but I employ an active investment approach in the selection of general asset classes and subclasses in which to invest in the first place.  Compared to the actual global allocation of investable assets, my portfolio's allocation deliberately overweights U.S. stocks relative to non-U.S. stocks, and deliberately overweights, by an extreme margin, stocks in general relative to all other asset classes.

Kyle Schuant

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Re: Rate of Return on Everything: A 150-year History
« Reply #54 on: February 17, 2018, 04:00:11 AM »
Well, people always need somewhere to live, so it makes sense. Just don't buy in a one-industry town, since if that industry leaves, the town dies.
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Kalergie

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Re: Rate of Return on Everything: A 150-year History
« Reply #55 on: February 17, 2018, 04:25:19 AM »
Well, people always need somewhere to live, so it makes sense. Just don't buy in a one-industry town, since if that industry leaves, the town dies.

Yes, but also people always have to eat. That does not make me want to own a grocery or a farm. I am pretty real estate/brick and mortar averse though!


Kyle Schuant

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Re: Rate of Return on Everything: A 150-year History
« Reply #56 on: February 17, 2018, 01:43:22 PM »
The price of food is relatively volatile, because so much more is produced than is needed, and each food has many substitutes. The same is not generally true of housing. If I decide that the $30/kg steak is too expensive, I can just get the $5/kg chicken instead. Over enough iterations, this gives the beef seller incentive to lower the price, and the chicken seller incentive to raise it, and so they become 20 and 10 instead, and so on.


As well, the lower price of food gives it some volatility. It's no big deal for a loaf of bread to go from $2 to $1 literally overnight, or vice versa; but a house and land won't go from $1,000,000 to $500,000 overnight unless arson is involved, or vice versa unless zoning laws change, or something. Real estate's more stable than food.


This is less true in countries with no real banking and credit regulation, like the US. A lack of regulation of the goods and services in a market lead to price volatility; more regulation, though often onerous, leads to price stability. It might be driven higher, or lower by the regulations - but it's more stable.
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