asset allocation play, thinking about adding REIT or fixed-income ETF

[stoxtrader]

The title says most of it. I currently have about 30% of my net worth in real estate, approx40% in equities, very well diversified, and now 30% in cash (earning approx 5% pre-tx risk free). As problems go it's an ok problem to have but I would like to drawdown some. I currently have zero exposure to fixed income other than my high yield savings accts and thought this may be an ok time both marketwise and personal asset allocatin wise to dip my toe in terms of building a fixed income position.

I also think it may be an ok time to start a position in various commercial or other types of REITs. I will certainly be doing some research on my own but I would appreciate suggestions from posters here.

for instance, without doing any work at all, I could buy maybe a 1-2% position in BLV (vanguard, 9bps) or TLT and/or IEF, basically the lehman long-bond ETF with an expense ratio of 15bps. I can probalby do better but maybe not by too much..

for a REIT what about something like VNQ or RWR?

I would assume I don't touch this trade for another 10-30 years on the sellside.

[pokerpunchout]

I have done well with OHI and ENN. I have owned OHI for over 2 years and ENN for about 1.5. Both pay a nice div and have had strong growth.


Just my opinion, Do your own DD.

[Jeff W]

Do you have room in tax-deferred? I wouldn't hold REITs or taxable bonds in a taxable account.

If you don't mind buying individual bonds, TIPS are a great deal at the moment--2.75% real yield. 10 and 20 year TIPS auctions are coming up in July.

[stoxtrader]

[ QUOTE ]
Do you have room in tax-deferred? I wouldn't hold REITs or taxable bonds in a taxable account.

If you don't mind buying individual bonds, TIPS are a great deal at the moment--2.75% real yield. 10 and 20 year TIPS auctions are coming up in July.

[/ QUOTE ]

i have a SEP IRA that is fully invested and a 401k that is fully invested and illiquid. I could concievably sell equities in the SEP and purchase one of these...

[Jeff W]

[ QUOTE ]
I could concievably sell equities in the SEP and purchase one of these...

[/ QUOTE ]

That would be my choice: Move equities to taxable and buy individual TIPS.

[stoxtrader]

[ QUOTE ]
[ QUOTE ]
I could concievably sell equities in the SEP and purchase one of these...

[/ QUOTE ]

That would be my choice: Move equities to taxable and buy individual TIPS.

[/ QUOTE ]

this makes a ton of sense, assuming that I don't sell my equities for a long time I'm getting tax deferred growth anyways. why use a tax sheltered account for that. Also, I lock in some games in my tx deferred account and my basis in the taxable accounts will be higher because of the mkt runup.

as far as TIPs go, why those over something simple like an ETF? I will probably be doing a total of 100k into this stuff at this point, so transaction costs not completely immaterial, but close.

[stoxtrader]

right now I'm leaning towards just dumping my SEP all into TLT. I looked at TIP, also the vanguard ETF (just launched), and also thought about getting shorter duration stuff but overall currently like this idea. interest rate risk being my biggest risk but I have more ammo if needed.

[Jeff W]

[ QUOTE ]

as far as TIPs go, why those over something simple like an ETF? I will probably be doing a total of 100k into this stuff at this point, so transaction costs not completely immaterial, but close.

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All the TIPS funds/ETFs are low duration--6 years IIRC. 2.75% is historically very high for TIPS, so I plan to buy 20-year individual TIPS at auction to lock in that rate. With TIPS, you can increase duration without increasing correlation to equities as much as you would with nominal bonds.

TIPS fund/etf is fine if you don't want to try and lock in that rate.

[ QUOTE ]
right now I'm leaning towards just dumping my SEP all into TLT. I looked at TIP, also the vanguard ETF (just launched), and also thought about getting shorter duration stuff but overall currently like this idea. interest rate risk being my biggest risk but I have more ammo if needed.

[/ QUOTE ]

The problem with long term bonds is that as you increase duration, you increase correlation to equities. It turns out that it's more efficient to build a portfolio for Return X with short term treasuries and equities than it is to build it with long term treasuries and equities. Here is the chart I posted awhile back:

"Dcifrthis,

For a given volatility X or return Y, a portfolio of S&P 500 and 5-Year T-Notes had a higher Sharpe Ratio than a portfolio of S&P 500from 1927-Present:

<font class="small">Code:</font><hr /><pre>1927-2006

S&amp;P/LTGB 100/0 90/10 80/20 70/30 60/40 50/50 40/60 30/70 20/80 10/90 0/100

Std Dev 20.2% 18.3% 16.5% 14.7% 13.1% 11.6% 10.3% 9.4% 8.9% 8.8% 9.3%
CAGR__ 10.4% 10.1% 9.8% 9.4% 8.9% 8.5% 7.9% 7.4% 6.8% 6.1% 5.4%


S&amp;P/5YTN 100/0 90/10 80/20 70/30 60/40 50/50 40/60 30/70 20/80 10/90 0/100

Std Dev 20.2% 18.2% 16.3% 14.3% 12.4% 10.6% 8.9% 7.4% 6.2% 5.6% 5.7%
CAGR__ 10.4% 10.1% 9.7% 9.3% 8.9% 8.4% 7.8% 7.3% 6.6% 6.0% 5.3%</pre><hr /> "

The sweet spot is 2-year T-Notes a la SHY (ishares 1-3 year treasury bond ETF), though I have only ran the data from 72-06 on those.

[schnoodleC]

I own EGLRX. It is the Alpine International Real Estate fund. It is very well run and has a great track record. It is heavily invested in Japan, India, and Germany which are all markets that are starting to take off (in the case of Japan after a multi-decade slump) but are not overly bubbly yet [img]/images/graemlins/smile.gif[/img]

[stoxtrader]

jeff w - great point about increasing correlation to equities as duration increases, the whole point afterall is to increase diversification.

I just can't get past the yield difference given my time horizon, but im beginning to think that is a bit shortsighted. I will reconsider over the weekend. tx for the comments in this thread!