Thanks, Paul, for the great and well thought out analysis. Very helpful as I re-evaluate my thinking on these things.
I’ve held them for the hedge against high to hyper inflation and to a much lesser extent for the income. While something like land might serve this role, it occurs to me once you start adding buildings RE has really become a business like any other and as such it is just as susceptible to the ravishes of hyperinflation as any other.
REITs, of course, hold mostly apartments and commercial buildings. I’m very close to changing my position on this. With that in mind, any further REIT thoughts? Also, what would your choice be for a hedge against hyperinflation? My guess is most would say gold. But I gather that, like me, you are not a fan of the metal….
You’re correct that it wouldn’t be gold for me.
Honestly, I take MMM’s wild optimism here. I assume it’s not going to happen. There’s a few reasons for this.
Primarily, hyperinflation is just hard to plan for and to truly be protected from it I think you’d have to allocate a huge amount of resources that will then otherwise underperform.
Secondly, if the US goes in to hyperinflation I think the saying “You can run, but you can’t hide” would become painfully clear to the whole world. The US economy is such a central feature to the world economy that I think it would be hard to avoid the consequences with any typical assets.
Thirdly, if we look at the German stock market performance during their hyperinflation, it’s really not that bad, even in USD terms.http://www.businessinsider.com/heres-what-happened-to-stocks-during-the-german-hyperinflation-2011-11
Not bad as far as hedging a black swan.
Lastly, I think it’s something you could somewhat see coming. Once you know hyperinflation has arrived, I’d do things like hold foreign currency and/or say, cattle. I’d still avoid gold because foreign currency is a better medium of exchange and a steak is way more useful to someone on a monthly basis than a gold brick. In basically every hyperinflation situation we see that people are remarkably flexible. Barter systems spring up, so goods that are useful short-term (food, gas, clothes, etc) are going to maintain similar relative values.
Due to all of that, I just don’t really think it’s a situation worth hedging against. Ultimately, going back to MMM’s optimism, the most important asset during hyperinflation is me. If I can maintain my usefulness, I can make my way through hyperinflation. I’m sure it’d set financial independence back for me (or mess up plans for those already in it) but long run, we’ll be okay.
As far as last thoughts on REITs, after our discussion I’d have to say this. I think they have their place in more active portfolio (say someone who does growth, value, small cap type break downs). I think there they can make sense so long as you are following market conditions and keeping up with potential legislation as far as home ownership. Otherwise, in a fire and forget type portfolio, I have to agree with your conclusion, they’re essentially a specific business, and I think they won’t offer any substantial difference compared to a stock/bond portfolio.
I think international exposure would give more diversification although even that seems to correlate more and more with US performance. I lean toward the keep it simple approach. I enjoy talking about this stuff, but I don’t enjoy tracking finance news to the level required for anything beyond a big dumb stock/bond index portfolio.
If you want real estate as a hedge to hyperinflation (along the lines of my cattle ownership) I think you’d have to physically own the land with all the joys that entails.
So, there you have it. While the REITs have been a solid performer for us, they really aren’t well suited for the serious inflation protection role for which they were bought. For these reasons,
later today I’ll be entering an order to
Since these are mutual funds rather than ETFs, this trade will execute at the market’s close. When the dust settles our allocation will be 75% stocks/25% bonds. (It had been ~50% VTSAX, 25% Bonds and 25% REITs) Since REITs are a form of stocks, essentially our allocation remains the same.
But what about an inflation hedge?
Well, first remember that stocks serve that function well in all but the worst hyper-inflationary times. Then take a look at that last link Paul provided on how the German market performed during the 1930 when they went thru perhaps the most famous hyper-inflation in the developed world’s history. Pretty encouraging, especially considering that true hyper-inflation is a pretty rare thing and, as Paul suggests, something that we should be able to see coming. But I am pondering some alternatives, some along the lines Paul mentions.
Harry Browne wrote one of my all-time favorite books:
But I am not a fan of his “Permanent Portfolio,” the idea that by holding 25% of your money in each of four simple asset classes — stocks, long-term treasury bonds, gold and cash — you are set for most any disaster. No matter what should happen, one of these assets should be a winner: prosperity (stocks), inflation (gold), deflation (long bonds), and recessions (cash).
*Note concerning the painting:
When I asked my pal Alex to suggest one of his paintings to illustrate “stepping away” he sent me Samsara, along with this note:
“…this is as stepping away as you can get. Buddhists believe that there is a ladder of sorts that we ascend (or descend) during the cycle of life, death, and rebirth. We are rewarded for good works in one life by ascension to another life with better circumstances. The eventual destination is Nirvana, or Oneness with all things. This painting illustrates the passage of a soul from one vessel to the next, and for a moment is noticing that there is something else and is hesitating.”
This move from REITs is a fairly big step and it has required going thru editing and/or adding notes and addendum to the posts where references to REITs and VGSLX appear. Seems there are many more than I realized. I think I got most, if not all. But if you see one I’ve missed, please call it out in the comments below and I’ll get it taken care of. Thanks!