How about this simple portfolio?

[disneysteve]

A modern portfolio must have commodity exposure and more than just a token position.

I agree with this but there are numerous ways to accomplish this. You can buy physical gold, silver or platinum. You can invest in gold mining and production company stocks. You can invest in a diversified portfolio of stocks/funds focused on precious metals and commodities.

If your 20% for this sector will be diversified through a group of individual equities or equity funds, I'd take much less issue with it though that would still only have him 40% in equities. If, however, you are suggesting he actually put 20% of his money into physical gold, I think that is ill-advised.

[efutures]

I think 20% is way too lean in speculative stuff like commodities and especially precious metals

I'm obviously heavily biased on the subject but I would definitely + 1 this. Although it really depends on your expertise. Just be advised that often when people think they are diversified, their investments are in fact still correlated.

[Scanner]

DisneySteve,

I think you and I are seeing the REIT differently. You see it as a fixed income type of investment; I see it as an equity, similiar to an Income/Dividend paying mutual fund, where the potential for the valuation of the properties can appreciate or depreciate.

I place the equities thus:

Stocks
Commodities
Real estate/REIT

The debt sector:

Cash
Bonds

I mean, would you have a problem if I had recommended 20% Income Stock Fund and 20% Growth Stock fund? Probably not, right?

Also, doesn't it make sense, at this time in history to make a long term play on real estate via REIT's rather than stocks?

[photo]

DisneySteve,

I think you and I are seeing the REIT differently. You see it as a fixed income type of investment; I see it as an equity, similiar to an Income/Dividend paying mutual fund, where the potential for the valuation of the properties can appreciate or depreciate.

From my experience with REITs, they're quite a bit different from mutual funds. It's much easier to get out of a mutual fund than it is a REIT. I've seen friends' REITs go belly up whereas a mutual fund spreads the risk out. REITs are also best left in retirement accounts because of tax laws (no corporate tax if 90% of its taxable income is passed to investors). I have a few REITs but I'd never consider having them as 20% of my portfolio.

For passive investors like your friend, REITs are probably not the way to go, unless the money is in a REIT mutual fund.

[snafu]

Folks, there is the rest of the world! For example Brazil is doing well just now, the DOW is wrecking my August figures! Need a mix of Gov't & Corporate bonds unless you feel your gov't is about to default as per the lowered ratings.

I really like ETFs but you need to learn in baby steps. I'd look carefully at the specific type and holdings of any mutual fund. Active? Passive? Index? Dividend, Lg. cap/sm. cap ratio. At 43, I'd still put a small amount into a High Tech Fund and something medical...perhaps a 100-200 units of a particular stock if he knows the better manufacturers of prosthesis or new drugs for diabetes. Does anyone else use laddered CDs for cash holdings or emergency fund?

Even a passive portfolio must have at least an annual review and re-balance. The individual's circumstances can change and of course as we get older, it's important to get more conservative.

[photo]

Does anyone else use laddered CDs for cash holdings or emergency fund?

I would if I found one that offered better rates than the money market where my cash currently is.

[jpg7n16]

DisneySteve,

I think you and I are seeing the REIT differently. You see it as a fixed income type of investment; I see it as an equity, similiar to an Income/Dividend paying mutual fund, where the potential for the valuation of the properties can appreciate or depreciate.

Bonds appreciate in value too. They're still fixed income products.

REITs pay out regular income, which is the primary reason for owning a REIT. Therefore they are most aligned with fixed income products.

[kv968]

Here's a fund you might want to look into for your friend Scanner. Or for yourself for that matter:

Permanent Portfolio

It holds pretty much what you were looking at (17% cash/ 26% stock/ 29% bond/ 25% other). The "other" being mostly gold. It has a solid track record and a good expense ratio. Of course it might not fly as high as some when the market is good, but it won't crash as hard when it's bad either.

I've been looking to put some money into it myself but just never got around to it yet.

[disneysteve]

DisneySteve,

I think you and I are seeing the REIT differently. You see it as a fixed income type of investment; I see it as an equity, similiar to an Income/Dividend paying mutual fund, where the potential for the valuation of the properties can appreciate or depreciate.

Bonds appreciate in value too. They're still fixed income products.

REITs pay out regular income, which is the primary reason for owning a REIT. Therefore they are most aligned with fixed income products.

Scanner, you're post really made me think and do some research. Turns out that you and I (and jpg) are all correct to a degree. Real estate is considered by many to be it's own fundamental asset class - stocks, bonds, cash, real estate. It isn't Stocks and it isn't Bonds. A REIT owns hard assets which aligns it more with stocks but it also pays a fixed income (primarily from collecting rent) that aligns it more with bonds. Historically, it has posted returns lower than stocks but higher than bonds but also with volatility much higher than bonds. Some equate REITs to preferred stocks which are a hybrid of equity and bond with a high dividend.

So for portfolio purposes, where to put them? I can't seem to find a commonly accepted answer to that question. Every model seems to give them their own slice of the pie but it appears that it tends to be more included with the equity side of things.

[kv968]

Scanner, you're post really made me think and do some research. Turns out that you and I (and jpg) are all correct to a degree. Real estate is considered by many to be it's own fundamental asset class - stocks, bonds, cash, real estate. It isn't Stocks and it isn't Bonds. A REIT owns hard assets which aligns it more with stocks but it also pays a fixed income (primarily from collecting rent) that aligns it more with bonds. Historically, it has posted returns lower than stocks but higher than bonds but also with volatility much higher than bonds. Some equate REITs to preferred stocks which are a hybrid of equity and bond with a high dividend.

So for portfolio purposes, where to put them? I can't seem to find a commonly accepted answer to that question. Every model seems to give them their own slice of the pie but it appears that it tends to be more included with the equity side of things.

If I had to choose, I'd say that a REIT fund falls more on the equity side than the fixed income. An individual REIT however could be considered more of a fixed income asset or preferred stock depending on how much yield it produces (i.e. NLY, AGNC, etc...)

Nonetheless, to me a REIT is an asset class in itself. REIT's currently have a correlation of around 60-70% to the S&P 500 whereas normally it averages about 50%. And what is an "asset class" really but an investment that behaves differently than others? I think there's nothing wrong with having 5-15% of a portfolio invested in them.

[disneysteve]

I think there's nothing wrong with having 5-15% of a portfolio invested in them.

Just to be clear then, when we talk about an allocation of 60% equity and 40% fixed income, the REIT would be part of the 60% equity. Correct?

In that case Scanner, I retract my earlier statement about REITs being part of the fixed income allocation.

As for the metal/commodity part of things, that's another issue. As you all know, I am not a gold bug. I have no problem with having a small position in such things, and I do in my own portfolio, but there are also different ways to accomplish that. I own a precious metals mutual fund composed of stocks in companies involved in the precious metal industry. That clearly makes it an equity position. But what about folks who own actual gold? That isn't an equity though it is a hard asset. Where does that fit in the allocation?

[jpg7n16]

I'll just throw another wrench in the works - don't forget to see what type of REIT you're looking at.

Real Estate Investment Trust (REIT) Definition

Some REITs own properties, others only own mortgages. So just because you own a REIT, that doesn't necessarily mean you own any real estate. Mortgages are very similar to bonds.


As part of the portfolio, REITs are kind of like the mutual fund version of real estate and/or mortgages. And although they are their own asset classes, real estate and mortgages are most aligned with the fixed income portion of the portfolio. Just like how preferred stock, although an equity security, is actually considered more aligned with fixed income.

But there are all sorts of asset classes

From: Asset allocation - Wikipedia, the free encyclopedia

There are many types of assets that may or may not be included in an asset allocation strategy:

• cash and cash equivalents (e.g., certificate of deposit, money market funds)
• fixed interest securities such as Bonds: investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets; or Convertible security
• stocks: value, dividend, growth, sector specific or preferred (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; public equities versus private equities, domestic, foreign (developed), emerging or frontier markets
• commercial or residential real estate (also REITs)
• natural resources: agriculture, forestry and livestock; energy or oil and gas distribution; carbon or water
• precious metals
• industrial metals and infrastructure
• collectibles such as art, coins, or stamps
• insurance products (annuity, life settlements, catastrophe bonds, personal life insurance products, etc.)
• derivatives such as long-short or market neutral strategies, options, collateralized debt and futures
• foreign currency
• venture capital, leveraged buyout, merger arbitrage or distressed securities

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.

It would be impractical and confusing to attempt to tell someone how much to invest in each and every asset class. Rather than saying "63% stocks / 21% bonds / 7% Real estate / 4% cash / 5% precious metals", it's much easier to just say "70% stocks / 30% bonds." People are more inclined to implement advice when it's easy to understand.

[disneysteve]

it's much easier to just say "70% stocks / 30% bonds." People are more inclined to implement advice when it's easy to understand.

I agree which I why I was trying to clarify where certain asset classes like REITs or precious metals fit in that simple allocation. I think there are enough of us around here who are beyond the oversimplified 60/40 or 70/30 advice. It can get complicated, though. If I actually own an investment property, that's different than me owning shares of a REIT. If I actually own physical gold, that's different than me owning a precious metals stock mutual fund. Those are example of where the simple stock/bond allocation can get confusing.

[kv968]

In a quick, down and dirty explaination, I'd say a REIT is an equity. However, when I try to explain asset allocation to someone who really doesn't know anything about it I generally use a three tier approach if you will...

1) Stocks/bonds

2) Domestic stocks/ int'l stocks/ bonds/ emerging markets/ REITS/ precious metals

3) Small-cap value stocks, small-cap core stocks, small-cap growth stocks, mid-cap value stocks, etc... corporate bonds/ gov't bonds, etc...

I can usually get through #2 but once I get to the third option the person starts to glaze over most of the time so I stop short there

So I guess you could say in the simpliest of terms I would group REIT's as an equity but with just a little more explaination I'd consider them a class unto themselves. One of the reasons I would put REITs into a category of their own is because if you just talk about basic stock indexes (S&P or int'l indexes), real estate is a very small percentage of their makeup. Therefore a little "outside" exposure to that class could help round out the diversification. The same could probably be said with utilites and some other subclasses, but with their historical lack of correlation to the major indices, I'd give REIT's their own allocation in a portfolio.

[Scanner]

It would be impractical and confusing to attempt to tell someone how much to invest in each and every asset class. Rather than saying "63% stocks / 21% bonds / 7% Real estate / 4% cash / 5% precious metals", it's much easier to just say "70% stocks / 30% bonds." People are more inclined to implement advice when it's easy to understand.

Well, we have come full circle as to why I recommended a simple split of 5 asset classes and DS's and my discussion of "simple vs. complex."

Yes, I ahve seen Permanent Portfolio fund before - good fund. I have watched it from time to time based on JimOhio's rec.

Again, I haven't linked him to the thread but I will do so now. . .he can read dissenting and differing opinions. I have nothing emotionally invested in this.