REITs (Real Estate Investment Trusts) are part of our "Resource Stock" allocation (one of our six asset classes). Currently we think they are a good investment. It is one of the few allocations which we got out of entirely during its run up and then got back into it in 2009 after the bottom. In normal markets we think a 10% allocation specifically to REITs makes sense in a portfolio.
We divide our REIT allocation into two ETFs:
Vanguard REIT Index ETF (VNQ)
Vanguard Global ex-US Real Estate ETF (VNQI)
with about 60% in the U.S. and 40% in foreign REITs.
Jon120772: I agree with David. Utilizing cost-efficient REITS such as Vanguard REIT Index ETF is a great way to minimize costs while adding diversify to your portfolio. I'd encourage utilizing 5-10% of your portfolio in this asset allocation.
Hi Allen, We recommend having a large 30-year fixed mortgage at these interest rates (3.635%) as a 30-year fixed mortgage that you pay the minimum on is the best hedge against inflation. So I would keep the large mortgage regardless of keeping or selling the condo.
Having said that, if you are willing to hang onto the condo and have the hassle of renting it, I think doing that would be a good option.
Allen: I think the answer depends on your expertise. If you are comfortable and capable of fixing adjustments that need to be made on the rental property, than maintaining that property can be a way of keeping a diversified portfolio and even generate potential tax benefits. However, if you are incapable of maintaining the property or have no interest in keeping the property in good shape yourself, selling the property and investing in a range of diversified stocks and bonds might be the better way to go.
Allen, remember that there are tax consequences when you sell the condo if it was converted to investment property. That plus the hasstle might put selling in the "to do" column.
Alright, less than 30 minutes to go! We have a few more questions in the queue, hopefully we can hit them all!
Jaybird: I certainly hope that her entire portfolio isn't invested in just bond funds. It is hard to predict what bond funds will do over both the short and long term, but not having a mixture of bonds and stocks is simply asking for trouble. Step one should be identifying an appropriate mixture of stocks and bonds that is assertive enough to meet your mother's retirement needs, but conservative enough to not suffer excess market fluctuations.
Jaybird: Do you know the percentage of her portfolio that is invested in bond funds?
Another one to mull over too, going to try to put a couple more on the table...
Hi Jaybird, All the studies suggest that at age 65 you have a better chance of meeting your life goals with a 75% appreciation and 25% Stability portfolio (75-25) than a 60-40 or 50-50. Sometimes I think advisors recommend more conservative portfolios because clients won't fire you in an up market when you are earning less but they will fire you in a down market when you are losing more.
We ignore those pressures and try to education our clients on why a slightly more aggressvie portfolio give them a better chance to meet their goals. Your mom is only slightly older than the 65 year old studies. Here would be our recommendation for a 68-32 portfolio:
@Here is a portfolio for 69 years old:
Recommended 69-Year Old Portfolio
31.6% Stability
68.4% Appreciation
Here is the breakdown between the three asset classes we use for stability and the three we use for appreciation:
5.0% Short Money
15.4% US Bonds
11.2% Foreign Bonds
22.7% US Stocks
25.5% Foreign Stocks
20.2% Resource Stocks
Hi Garrettpigu, The U.S. stock markets are bullish, so you could start with foreign stocks or resource stocks. Here are some country specific investments for the countries with the most economic freedom with also have low debt and deficit: Hong Kong (EWH), Singapore (EWS), Australia (EWA), New Zealand (ENZL), Switzerland (EWL), and Canada (EWC). Or you could invest in Emerging Markets (VWO).
Resource Stocks haven't been doing as well, so you could start with Natural Resources (IGE), Vanguard REIT Index ETF (VNQ), or Vanguard Global ex-US Real Estate ETF (VNQI).
And in the United States, Technology still hasn't been performing as well, so you could invest in Technology (VGT).
And as another reminder, it is always a good time for a balanced portfolio.
Jaybird, I have a slightly different approach than David. I think the first step should really be determining how much income you need annually to maintain your standard of living. If it turns out that an aggressive portfolio is necessary in order to obtain the required return, than the allocation David mentioned is certainly fitting. However, if you are an individual that actually requires a minimal return on your portfolio in order to maintain your spending level, then it may not be necessary to have a particularly assertive portfolio. Some clients choose to utilize a portfolio with less volatility and maximize the probability that they won't outlive their funds.
Christopher: Investing in a friend or relative's business is risky stuff, period. In many occasions, investing with associates have permanently damaged those relationships. Generally speaking, I'm not a fan of this type of investing. However, one approach would be to invest a small amount of funds and consider it the most aggressive portion of your portfolio. With this attitude, you have to have the mindset that the investment could completely fail, and be comfortable and accepting of that possibility.
Hi Laurie, When children invest and get some experience with the markets it is the best possible education. $5,000 gives an opportunity to buy one or two ETFs or a few smaller mutual funds. For young accounts we like more aggresive but still diversified investments. Take a look at Vanguard Technology (VGT) or Vanguard Emerging Markets (VWO) or Vanguard Mid-Cap Value (VOE) or Vanguard Small Cap Value (VBR) or some of the country specifi investments I mentioned earlier.
It is even better if children have earned income and can put the money in a Roth IRA account and invest there.
Laurie: Assuming these funds won't be utilized for an extended period of time, I'd steer your son towards a diversified fund at Vanguard. These funds are inexpensive and allow exposure to a broad range of asset categories (large cap, small cap, international, and various types of bonds). Once your son obtains sufficient funds, he can attempt to diversify using mutual funds focusing on specific asset categories - ie. find the best large cap fund, the best mid cap fund, the best corporate bond fund, etc.
We'd also like to give a BIG thank you to our panel of advisers: Lon, David and Debbie!!
Laurie: You could also look at something like a Vanguard LifeStrategy Growth Fund (VASGX). The fund is about 18% bonds and has exposure to both US and international stocks.
Thanks again for the conversation. If nothing else, remember that an fee-only advisor that serves as a fiduciary is your best bet for getting sound advice
that is in your best interest.
Great advice. Thanks, Lon!
REITs (Real Estate Investment Trusts) are part of our "Resource Stock" allocation (one of our six asset classes). Currently we think they are a good investment. It is one of the few allocations which we got out of entirely during its run up and then got back into it in 2009 after the bottom. In normal markets we think a 10% allocation specifically to REITs makes sense in a portfolio.
For anyone looking for a mutual fund, we have a great tool here: mykip.co
