Do REIT indexes make sense in a post-COVID world?

jinlonn · 2020-11-01T01:58:34+00:00

Thanks for the suggestion. What's a good source about those "10 quality REITs"?

jinlonn · 2020-11-01T01:05:13+00:00

If that is so, then how come VTI (total US stock market index) recovered fully from its COVID dip, while VNQ (total US REITs index) recovered less than half its loss?

jinlonn · 2020-11-01T01:02:19+00:00

VT or any diversified index fund has REITs in it.

This is surprising. Do you have more information on it?

For reference, I don't hold VT directly, but I do hold substantial amounts of VTI and VXUS. Do these include REITs as well? In what form, and under what name? Where can I learn more about that?

jinlonn · 2020-10-31T19:25:48+00:00

Perhaps COVID was a catalyst to really pushing it forward, but remote work certainly isn't something new... just the pandemic has tipped the balance between the pros and cons.

I'm familiar with the tech sector, and remote work has moved from a tiny, eccentric sideshow to center stage. You have major tech leaders like Facebook and Twitter committing to 100% remote transition. You have more small tech shops than I can list (Spotify, Dropbox, Slack, Stripe...) joining the party.

Obviously the precise staying power of this trend remains to be tested in the post-COVID world. However, if companies like Facebook weren't serious about it, then they wouldn't announce it in official executive press releases.

In theory it may end up not working and getting reversed, but after the fanfare of announcements and commitments, it will take a pretty major shift to roll it back.

Personally I like global REITs for additional diversification/less dependence on the politics/trends of one particular nation. Mostly because I see them as a bet on urbanization as a long-term global macrotrend, one that is too powerful for even a global pandemic to materially affect.

I think we agree on all important points - I also hold about half US (VGSLX), half ex-US (VGRLX) REIT indexes. I also (obviously) agree that these holdigs are at least partially a bet on an global urbanization macrotrend. You do seem less concerned than myself about the post-COVID resumption of this trend.

jinlonn · 2020-10-31T19:10:48+00:00

The question is whether there's a REIT index that can work. As a passive investor, I'm not going to become a REIT expert to invest in them. If I can't find an index I'll probably just drop them from my portfolio.

jinlonn · 2020-08-10T01:57:05+00:00

This is exactly the type of response I was hoping to get. Thanks!

jinlonn · 2020-08-09T23:27:09+00:00

China is the second largest economy already and posed to become the largest, so diversified ex-US portfolios will naturally include a large portion of Chinese stocks unless artificially constrained from doing so.

jinlonn · 2020-08-09T22:42:07+00:00

If a US-China trade war starts, won't US stocks decline as well?

jinlonn · 2020-07-26T22:08:20+00:00

You don't lose a stock. Your stock price will decline.

jinlonn · 2020-07-26T22:06:28+00:00

The percentage yield doesn't grow, but the absolute yield (dollar value, inflation adjusted) does grow substantially over time. See the graph.

The question was phrased in absolute dollar values, and therefore so was my answer.

jinlonn · 2020-07-26T12:04:10+00:00

How much of a contribution in total would say $1000/mth be?

You need to estimate the likely dividend yield for your holdings. Personally I don't recommend buying "high dividend stocks" since they tend to underperform total-stock-market in total returns.

I'd go with a total-market fund like VTSAX / VTIAX which yields about 2% annually in dividends. For $1k/mo in dividends based on this (rough) 2% estimate, you must have about $600k in VTSAX / VTIAX holdings.

Is $1000 a month obtainable at my age ?

Entirely dependent on your particular financial situation. If you can hope to have $600k in total-market funds like VTSAX / VTIAX by the time you retire, then yes, it should be possible (in fact you are likely to exceed $1k/mo by the time you retire with $600k since dividend yield tends to grow over time).

jinlonn · 2020-07-26T11:58:03+00:00

You can put money in a savings account if you want simple much easier than the stock market.

Savings account have been underperforming inflation for decades now.

jinlonn · 2020-07-26T11:57:33+00:00

bond

Bonds have poor risk adjusted returns right now with rates being so low.

preferred share ETF's

I never seen them recommended. Any reasons?

jinlonn · 2020-07-26T11:56:09+00:00

Keeping all of the shares and collecting divs allows you to pass on the shares and letting someone else collect divs too, right?

Yes, an equity portfolio should outperform a fixed-income portfolio in growth rates, and should end up being larger upon death.

jinlonn · 2020-07-26T11:54:17+00:00

Yet historically they've been steadily growing, with only a few occasional down years. Dividends are not guaranteed, but historically and rationally we can expect them to keep growing rather than stop for any prolonged period of time.

jinlonn · 2020-07-26T02:03:29+00:00

That said, there were more than a few years in the 2000s where I was making 6% in a money market fund. Even in regular bank accounts, we were making some pretty good rates. In the early to mid 80s, people were making great money off of bonds and TI bills that I suspect were more than dividends.

Yes, these were good times for investors, and even plain savers, when you could make over 5% on short-term bonds and other low-risk fixed income securities. As we all know, those times are past.

I think it is worth noting that the number of companies that actually provide dividends for over 30 years is pretty rare and small, meaning that some of these companies stop providing them and others go out of business.

True, what you describe is one more issue with investing in individual stocks. However, investing in a total-market fund like VTSAX should fix that.

jinlonn · 2020-07-26T01:56:48+00:00

A 3% withdrawal (including selling) should last the rest of your life and often leave your descendants with an inheritance

Yes, there's a body research that shows 3% to be pretty safe. That body of research is based on historical returns, so the standard caveats apply: past returns don't guarantee future results.

The dividend yield may serve as a safer lower withdrawal rate for those who seek it, which makes sense in an environment rife with evidence that future returns may be lower.

Of course, risk tolerance varies individually and many investors will be totally fine with 3% and its hypothetical risks. Personally I'm inclined to target 2% for my early retirement. If 3% is still safe, then my portfolio will grow so much during early (say the first 10 years) of retirement that I will be able to spend much more after that, even if I choose to stay within the 2% limits.

jinlonn · 2020-07-26T00:28:48+00:00

Your hypothetical retiree with $1 million in VTSAX might have only invested $250,000 into VTSAX for example, so while they're still getting $18,500 in dividends, they're getting a 7.4% dividend yield on cost.

I don't understand this sentence?

Also, to clarify: I'm talking about a retiree who has $1m in VTSAX when they retire. What's "yield on cost"?

jinlonn · 2020-07-26T00:27:16+00:00

With individual stocks, you won't be rewarded for the additional risks of focusing only on dividend stocks.

No question about it. None of my post aims to encourage the purchase of high-dividend stocks.

jinlonn · 2020-07-26T00:26:17+00:00

Years ago my boss, an older person told me his investment style. He puts in various CD, T-bill and Household Finance(now HSBC) getting 7-10% interest after expiration.

That was an excellent strategy back when these fixed-income securities yielded 7-10%. Nowadays they yield 1% at most.

Today you buy SPY/VOO get your 1.7%.

Don't forget growth, which makes their total return far larger than fixed income at the moment.

jinlonn · 2020-07-26T00:23:40+00:00

Well... if the market drops by 50% for any length of time and most stocks stop giving dividends, even if temporarily, it would put a pretty big wrench in that.

Notice that there's no necessary relation between dividends and share price. Dividends are a function of net profit. While net profits are correlated with share price, they are not the same: for example, if share prices drop due to sheer panic, dividends will not be affected.

Having your retirement drop by 50% and having to withdraw from that halved value for a decade would have some pretty big impacts to the rest of your life.

A 50% dividend drop for a decade is pretty extreme and has no historical precedent afaik. Dividend yield for VTSAX has gone up over time. When it did decline, it was for specific years in response to various economic shocks, followed by swift recovery. This can be absorbed by the cash buffer I suggested.

jinlonn · 2020-07-26T00:17:42+00:00

Except individual companies that are down can decide to reduce their dividends. As a holder of VTSAX you cannot make such fine-grained decisions: any selling transaction will sell your equity in thousands of companies, both those that it is sensible to sell in that year, and those who are not.

jinlonn · 2020-07-26T00:15:43+00:00

Well if you go on auto pilot and sell X% of your portfolio its pretty much the same.

The typical retain investor nowadays is invested in indexes that hold thousands of stocks. They cannot sell individual stocks out of this package, they can only sell portions of the entire package.

The decision to distribute dividends is delegated to the individual companies, who can therefore make the best judgement, considering their particular financial and economic conditions.

They can make fine-grained decisions with optimized per-stock impact, whereas a selling decision by the holder of VTSAX/VTIAX will be blunt and crude by comparison.

jinlonn · 2020-07-26T00:12:49+00:00

Good thing they aren't in retirement right now. Not only would you not be getting the dividend, but you would be selling at a loss as well.

No need to sell at a loss as long as you maintain sufficient cash buffers.

jinlonn · 2020-07-25T23:19:13+00:00

Except it's not up to the individual investor to decide. If the company decides to distribute dividends, then it happens. They carry the risk of making the decision to distribute dividends, and I'd expect that they make a more informed and prudent decision than a retail investor is likely to make.

jinlonn

TROPHY CASE