Stocks — Part XXII: Stepping Away from REITs

Last week I received a comment from a reader named Paul. In it he asked this very provocative question: “Curious why you view REITs as an inflation hedge any more than stocks are an inflation hedge.”

As it happens, that’s a question I’d been pondering a lot of late. Regular readers will know, as described in the posts What we own and why we own it and Stocks Part VI: Portfolio ideas to build and keep your wealth, I personally keep 25% of our portfolio in REITs. Specifically VGSLX (Vanguard REIT Index Fund).

Real Estate Investment Trusts (REITs) are mutual funds that invest in real estate. My thinking was they would serve as an inflation hedge. The idea being in times of inflation people flee cash and buy tangible assets, like real estate. The fact that VGSLX pays about a 3.5% dividend was a bonus.

Now while I like to receive dividends as much as the next guy, for reasons I lay out in the post Dividend Growth Investing, I am not a fan of pursuing them as a portfolio strategy. Suffice to say the dividends were a very distant secondary consideration. Still, they provided a stark advantage over, say, gold.

The point Paul was correctly making is that stocks also serve well as an inflation hedge. It is a point I’ve also made, for instance in the first of those posts linked to above:

Stocks are, over time, a fine inflation hedge. People forget that stocks are not just pieces of paper.  Stocks are pieces of ownership in operating businesses. Sales, inventory, plants, equipment, brands et al. All of which rise in value with inflation.”

My concern was that during periods of intense hyperinflation that might not hold true and the damage to the economy would overwhelm the ability of businesses to deal with it. Real estate as a tangible asset held by my REITs, would hopefully do better.

For inflation of modest to modestly severe levels this might well be true. Although, upon further reflection, not so much as I might have hoped. Worse, should the problem ever reach hyper-inflationary levels, REITs would very likely fair no better than the broad portfolio of stocks held in an index fund like VTSAX.

The problem is that REITs are made up primarily of companies that hold office buildings, apartment buildings and the like. Once you put a building on a piece of land it effectively becomes a business with the same potential and shortcomings of other businesses. That’s fine in times of normal to high inflation. In times of hyperinflation we’re asking too much of it.

Here, with some editing for space, is the rest of my conversation with Paul starting with my initial reply. If you are interested in the unedited version you can read it in its entirety on Ask jlcollinsnh starting on May 21, 2014.


Inflation is, of course, the process of prices increasing. For the last several years the Federal Reserve has been trying hard to ignite a bit of it into the economy. Mostly to stave off the prospect of deflation and collapsing prices, but also because modest inflation, as you suggest, is good for businesses. It allows them to raise prices and wages while posting greater profits.

The problem comes when inflation rages out of control. In that scenario, business finds it far more difficult to keep up. Credit becomes tight and extremely expensive. Lenders demand huge interest rates to compensate for the increased risk of being paid back with currency rapidly dropping in value, perhaps to the point of worthlessness, as in Germany in the 1930s.

All of this combines to overwhelm a company’s business and in the process destroys the value inflation would have otherwise created.

In times like these, money flees into tangibles and real estate is perhaps the most favored.

Of course, REITs are made up of real estate businesses like office and apartment buildings. These are also not immune to serious hyper-inflation.

I confess that sometimes I wonder if I really need the REITS and holding just stocks and bonds appeals to my preference for simplicity. But each time I review it the value of the extra (if not perfect) hedge wins out. The higher dividends don’t hurt either.

As you might be able to tell, I wasn’t entirely comfortable with this explanation. Since I had the sense that Paul is an astute guy, I asked him for more on his perspective.


So this will be somewhat a whacky economist’s point of view (both my job and education).

I guess part of my reluctance to buy into REITs is from looking at the fundamentals. Land itself is not a productive asset. Therefore, unlike stocks which are based on companies, it cannot increase in productivity. Any capital gains on real estate is due to some other factor.

Now, this can be for legitimate reasons (I live in Houston and houses are getting more expensive due to an influx of people), but it can also be for silly reasons. Up until the late 90s when we as a country decided everyone should own a home and incentivized it, housing prices essentially tracked inflation. There were no capital gains.

That means if I am hoping for anything in excess of the high dividend I have to assume the REIT owns property where demand is increasing, or rely on the government to continue to incentivize or boost real estate sales somehow. I suspect (and this is my wild guess) that the latter is not sustainable indefinitely. I already rent on a 6 figure salary because housing is a poor deal and I live in one of the cheaper big US cities.

Now, the higher dividends are nice, but the economist in me is doing some NPV (net present value) discounting and wondering if that’s not just trading dollars now for higher dollars in the future. That’s not to say that’s a bad decision if my time value of money is lower than most people. I suspect that is a true statement for most people on this website.

To get back to my original question, as far as why REITs for an inflation hedge, the problem I still have is this:
At best, they will beat stocks when we are incentivizing home ownership. At worst, they are likely (on average) to match inflation from a capital gains point of view and provide a healthy dividend. Now, neither of those is bad, but neither captures the value of increasing productivity like the stock market does.

The reason I’m asking here is because I can’t find good data on the historical returns of real estate vs stocks. Most of it is focused from 2000 onward.

As far as the potential for hyperinflation, I’m not sure either asset will do great in those cases. I can’t imagine selling a house is much more fun than selling a burger in a time of hyperinflation.

Essentially I still kind of see REITs as similar to investing in gold. Any capital gains rely on changes in demand and supply rather than fundamental increase in productivity. Caveat here that real estate is at least far more useful than gold, which is why you see the higher stability in prices.

Anyway, thanks for your thoughts. I don’t disagree with any particular point, but like you I wonder if REITs are needed. Right now I own none, and I am leaning toward staying with just stocks and bonds.

As you can see Paul not only reinforced my growing misgivings as the the usefulness of REITs during times of hyperinflation, he also points out several of their other shortcomings. My reply:


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 hyperinflation 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.
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 breakdowns). 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

sell our REIT fund VGSLX and roll it into VTSAX.

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 hyperinflationary 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 hyperinflation in the developed world’s history. Pretty encouraging, especially considering that true hyperinflation 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).

The problem with this, as I see it, is that financial disasters are actually rare events. Structuring a portfolio focused on disaster carries a very high cost in lost opportunities when times, as they most often are, are more normal and prosperous.

The value of cash is relentlessly eroded over time by even modest levels of inflation. Gold, Browne’s inflation hedge, has no earning potential. In fact some, like William Bernstein (from this Forbes article) suggest that gold isn’t all that good an inflation hedge anyway:

“Commodity producers, it turns out, have worked better. The cheapest solution is to hold an internationally diversified stock portfolio, so that rampant inflation in the U.S. can be offset by more stable returns from foreign stocks. A long-term, fixed rate mortgage tied to a house not purchased in a bubble will also offer an offset. Finally, there are inflation-protected bonds (TIPS) for those who want them.”

Well we already own the commodity producers in VTSAX and TIPS are paying well under 1% in interest, making them very expensive inflation insurance.

A long-term mortgage is an interesting idea as in effect you are shorting the US dollar. The major drawback being the inflation protection is heavily weighted toward the early years and disappears completely as it is paid off. As Brett Doyle says in his comment on my post Why your house is a terrible investment (See Addendum #3):

“Having a mortgage is a great way to short the US dollar because of the long maturity and low rates…make sure to constantly take all of the equity out…because our society has decided that homes are the “chosen” asset class and distorts the market by redirecting resources into mortgages it makes sense to buy a home. I would never even consider buy a home with my own money, but hey, if the US taxpayer and a bank is dumb enough to loan me several hundred grand at 3% for 30 years and give me a tax deduction sure why the hell not.”

But what really caught my eye was this suggestion: “an internationally diversified stock portfolio.” Very intriguing. Even more so when in the same article it is claimed this is also a sound deflationary hedge (along with gold—better than for inflation actually—cash and long-term Treasuries).

Mmmm. Adding an international stock index fund might serve as a hedge against both inflation and deflation? Very interesting concept indeed!

For reasons I describe here, I don’t see the need to hold an additional international position once you have VTSAX. Those reasons still hold true, but this new angle just might change my thinking. I’ll need to ponder and research it a bit more.

Of course, this is also similar to Paul’s suggestion of holding foreign currencies, and for the same reason. At least until we have a meltdown when you’ll want food, gas, clothes and cattle to barter.

Or as Rich added, somewhat tongue-in-cheek, to that May ’14 Ask jlcollinsnh conversation:

“In prison cigarettes are always worth something, Buy them now and hold for future resale. Now that’s an inflation hedge. Maybe sugar too.”

A final thought. As of last Friday, May 23rd, VGSLX (my REIT fund) is up ~15% year-to-date and has still not reached its high set back in February 2007. On the other hand VTSAX (my stock fund) is only up ~2.5% so far this year and is right at its all time high; as is the stock market (S&P 500) itself, having just closed over 1900 for a record. So why sell the better performer to move into the laggard, especially with that laggard at all time highs?

Simple. I only buy or sell for strategic purposes such as this change in our approach. Never as an attempt to time the market. That’s a fool’s game. I have no way to know if the recent trend for these two funds will continue. No one does. For more on why see: Investing in a raging bull written almost exactly one year ago.

Importantly, since we hold VGSLX in our IRAs, we can sell with no capital gain tax concerns.

This post is only sharing a change in what we are doing and why. It is not meant to suggest that if you own REITs you should also sell them. That is a decision that depends on why you own them and the role they play in your portfolio. They can be fine additions to a portfolio and were to ours for many years.

Note 1:

This move from REITs is a fairly big step and it has required going through 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!


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  1. TallMike says

    Do you know much about other kinds of businesses that are reclassifying themselves as REITs? I believe Weyerhauser, a large timber company has done this, and perhaps some hospitals and some power producing stations. I confess to real ignorance on how widespread this tactic is, but if it is widespread enough, and REITs just start to look like another way to invest in certain industries, then is their an argument for REITs simply for diversification? (Or is that argument trumped by the already adequate diversification in a stock index fund, which wins the “keep it simple” contest?)

    This is the article that first made me think of this:

  2. Kenneth says

    Jim, congratulations on “rethinking things”. I’ve been following you for years now, and you are not guilty of doing this too fast or too slow. A 75/25 stocks/bonds mix is probably optimum (I may be older than you at 64, so mine is a bit more conservative at 60/40).

    I found Betterment a year ago, and there is one number you dial in – the stocks/bonds percentage ratio. They take care of the rest. My portfolio is invested in 10 low cost ETFs with them. Half of the portfolio is international, half is domestic US. To me, the very reasons you like VTSAX are why it might be a good idea to have an internationally diversified stock/bond portfolio. We are ONE world, and I am invested in the world.

    For a modest 0.15% annual fee (with more than $100k on deposit), they mix me into the 10 ETFs (12 if you are 60 percent or more in bonds). They rebalance every time you receive dividends, or add funds, to keep you near your desired stocks/bonds mix.

    Anyhow, Betterment works for me.
    You work for me, Jim, by educating me on the purpose of owning stocks and bonds long term, not trading in or out, using wide ranging index funds such as VTSAX. I have given up my day trading, trying to make a quick buck, solely based on your calming Stock Series. I now see companies rise and fall, but I am comforted that I own a piece of all of them, and the falling stars are replaced by rising stars every day.

    • jlcollinsnh says

      Wow Kenneth…

      You made my day with your beautifully written summation of your approach and the role this blog has played in it. Thanks!

      Thanks, too, for sharing your experience with Betterment. Like you I am a fan.
      I got to know them last Fall at FinCon and after numerous conversations became comfortable enough to recommend them:

      As part of that I also opened an account. I have been very impressed with their customer service and the steady stream of informative and encouraging emails. Just the thing to help someone new to investing and/or nervous to see the value and stay the course. No bad for us old-timers, either. 🙂

      Plus I love the way they use new money and/or dividends & interest to tax efficiently maintain your chosen asset allocation. That might even help offset the annual fee.

    • Jeremy E. says

      I still think it’s a good idea to have 15-25% in REITS, the reason being, during some stock market crashes, real estate doesn’t take as big of a hit. This wasn’t true in the 08-09 crash, but it was true in the tech bubble crash and many others. So if you have a good amount of stocks and REITS, you can rebalance them as necessary and have better returns. Also the vanguard reit has done better than the vanguard total stock market over the passed 10 years. However, I don’t think it will make a big difference, both ways will most likely do very well.

      My investments:
      14% value stocks (ARTQX)
      14% growth stocks (PRNHX)
      28% total stock market (VTSAX)
      14% International stocks (VTIAX)
      15% REITs (VGSLX)
      15% bonds (VBLTX)
      I rebalance every year, and when the stock market plummits, I plan on not just balancing but selling off extra bonds and extra reits (if reits haven’t plummited with the stocks) to buy as many stocks as possible. when the stock prices drop 25% i’ll sell 25% of my other funds to buy stocks, if it continues to drop i’ll sell more/buy more, etc. Also if the real estate market plummits I will sell off bonds and maybe stocks to do the same thing and put more into REITs.

      Do you think this is a good plan? I’ve only been doing this for about 6 months, so haven’t seen the performance of it much yet. Any input would be much appreciated, thanks.

      • jlcollinsnh says

        Hi Jeremy…

        I’m not sure who you are asking, Kenneth or me, but here are my thoughts.

        I don’t think your fund choices are horrible, but they are more expensive and complex than I would chose.

        Your two non-Vanguard funds are both actively managed and expensive, with ERs of 1.2% and .80%.

        I don’t feel the need for an international fund as explained here:

        And in this post I’ve explained why I’ve stepped away from REITs.

        If I understand your rebalancing plan correctly, what you are doing is market timing and that is something that rarely works out well.

        Rebalancing, which you should do, is simply a matter of buying and selling your funds each year or so to maintain the percentage allocations you’ve chosen as described here:

        So, if you are trying to implement the ideas I discuss here, you are pretty much off base. If that’s the case, hopefully my comments will help.

        Of course, if you are not, you are free to pursue whatever approach you please.

        Either way, good luck!

        • Jeremy E. says

          Sorry I’m new to this, yes I was asking you. My reasoning for the actively managed funds are for starters I like the idea of Value Investing, scientifically finding stocks with low price-earnings ratios etc. kind of similar to how Warren Buffet became the greatest investor, I’ve looked into things like VVIAX, but it’s not in my 401k plan and it also has historically had much worse returns . On the other hand I like balance, so I chose a managed growth fund with a decently low expense ratio (for managed funds at least) and the growth fund I chose has also had an average return of 11.5%/year since its inception in 1960, 54 years ago. I didn’t realize there was such a high amount of international in the total stock market fund, I think I will do some research and most likely replace my international with total stock market. Lastly I will be rebalancing normally once per year(my 401k provider offers automatic rebalancing for free at any date(s) I select), but if the stock market crashes I’ll sell all my bonds to buy stocks at a discounted price. I suppose you could consider this “timing the market”. But I can’t think of too many ways I could lose money doing this. Maybe if there is a bear market for 3+ years after I sell the bonds and during that time bonds continue to gain and I miss out on that?

  3. Anyways, Enjoy says

    “Now, the higher dividends are nice, but the economist in me is doing some NPV (net present value) discounting and wondering if that’s not just trading dollars now for higher dollars in the future. That’s not to say that’s a bad decision if my time value of money is lower than most people. I suspect that is a true statement for most people on this website.”

    This part confused me, I’d never thought of time value of money being different for different people. It also seems to be making a generalization of the readers here (not that I’m offended or anything, just curious) but I’m not quite sure what it’s implying. Care to elaborate?

    • Alex says

      Any time someone takes out a loan they are valuing money now more than money in the future and they are willing to pay interest to get that money now. If you invest or lend your money you don’t value your money now and are willing to give up that money now for more money in the future. The comment on JLCollins readers implies that we would rather be the lenders with money in the future than borrowers with money now.

      • Paul says

        Alex said it perfectly.

        If we think of a typical consumer, $1,000 today is worth a lot more than $1,000 in the future.

        At the other extreme, someone with no time value would consider $1,000 now worth the same as $1,000 in the future (ignoring inflation here). Obviously this would be silly. The point, as Alex stated well, is that savers and investors are closer to this second person than the person buying expensive cars and loading up on debt.

        Another way to think about it is that for a given amount of money in the future, the person with a low time value of money (savers and investors) considers it worth more than a person with a high time value of money (consumer).

        And yes, I was casting an assumption about Jim’s readership, but it was not meant to offend. I simply would guess that Jim’s readers are more savers than consumers.

        • Anyways, Enjoy says

          Thanks a lot for the explanation, I get the distinction now but terminology doesn’t seem very intuitive to me. If I would rather invest than have the money now, I would think that I have a higher time value of money, because I believe that time will make my money more valuable (ie. I think I can get 8% per yer, so to me $1,000 is ~$1470 in Future Value after 5 years). What’s the logic behind calling one low and the other high, unless we’re actually talking about how much I weight present value? Or is this just another financial term whose definitions espouse logic (in my admittedly limited financial education this doesn’t seem that uncommon)?

          • Paul says

            When I say high and low I’m thinking of the discount rate here. The time indifferent person (low time value of money) would have a discount rate of 0% for the future.

            Someone with a “high” time value of money has a high discount rate, say 15%, thus decreasing the value of money in the future.

            The math is pretty simple and you can read here:

            Essentially, the higher the discount rate and the farther out in time the money is, the less it is worth today.

          • Anyways, Enjoy says

            At the other extreme, someone with no time value would consider $1,000 now worth the same as $1,000 in the future (ignoring inflation here). Obviously this would be silly. The point, as Alex stated well, is that savers and investors are closer to this second person than the person buying expensive cars and loading up on debt.

            I guess this is what confuses me. As a saver and investor, $1000 now is worth considerably more than $1000 in the future. To me it’s worth the $1000 plus the 8% gains per year it will give me indefinitely. I value this because of the time value of money (explained very well in your post Jim, thanks).

            For the consumer, they are the ones who think $1000 now is the same as $1000 in the future since they are only going to spend it. $1000 will buy you the same stuff no matter what (we’re ignoring inflation here) so you might as well buy what you want now, and that’s because they have a low regard for time value of money.

            I get that you’re relating to the high or low discount rate, but logically it seems to me that people who see it as a high discount rate would naturally be savers and investors, they want that $1000 to be worth more, where as the consumers are time indifferent, they just want to buy $1000 worth of stuff.

            Also thanks for hashing this out with me. I hope I don’t come off as argumentative, I’m just trying to figure this out. I’m actually studying for my RP exam and have found the logic behind the terminology in the financial world (I have a tech background) to be rather arcane.

          • Jan says

            In accounting, debits and credits are the opposite of what you would think.

            Also while you value money because you can make 8% on it, the value of that underlying $1,000 is worth less each year. So if you are happy with an 8% return the NET PRESENT VALUE of $1,000 in 12.5 years ( rule of 72 ) is $2000 today. But $500 today will grow to $1,000, but it won’t be worth $1,000 either due to inflation or you valuing $1.00 today 8% more than a $1.00 one year from now.

    • Paul says

      Getting a bit hard to read, so replying down here.

      “I get that you’re relating to the high or low discount rate, but logically it seems to me that people who see it as a high discount rate would naturally be savers and investors, they want that $1000 to be worth more, where as the consumers are time indifferent, they just want to buy $1000 worth of stuff.”

      You seem to be thinking of the interest rate that one earns with money. The discount rate is a measure of how much the future is discounted. When I am talking about people’s value of money I am talking about this discount rate, not the interest rate. This is solely determined by the person.

      If we look at that formula, an increase in the discount rate decreases the value of the money. So for someone with no time value of money (our saver) the $1000 is worth $1000 no matter what point in time we are in.

      For someone with a high time value of money, the $1000 is worth less in the future.

      This makes sense with the distinction between a saver and a consumer. If my discount rate is say, 3% (saver) and I can invest in an asset yielding 7%, then the value of the money is increasing to me with time.

      If I am a consumer and my discount rate is 15% and I can invest in an asset yielding 7%, why would I save the money? It will only decrease in value as time passes, so I should spend it now.

      For an extreme example, think about receiving $1,000,000 in 10 years. If you have no time value of money, this is worth $1,000,000. What if you are extremely present oriented and discount the future at 500%. Then if you find the present value, you’ll get approximately 2 cents. To this person it is extremely important when they receive the money (time value of money is high).

      Hopefully this helps, I know the terminology is a bid odd. I come from a math background prior to my econ masters and some of it still bothers me.

      • Anyways, Enjoy says

        For an extreme example, think about receiving $1,000,000 in 10 years. If you have no time value of money, this is worth $1,000,000. What if you are extremely present oriented and discount the future at 500%. Then if you find the present value, you’ll get approximately 2 cents. To this person it is extremely important when they receive the money (time value of money is high).

        This clears it up wonderfully. Thanks for taking the time to go over this with me, I’m sure it’s a pain trying to explain concepts like this to people without the full background, but it is much appreciated.

  4. Jason Kennedy says


    Jason from the Ecuador trip here!

    I hope all is well. Very timely post I must say. Since our return I have been mulling over your points, and considering streamlining my Vanguard accounts. I had decided it was time to ‘toughen up cupcake’ and consolidate my bond fund (VBTLX) and international stock fund (VTIAX) into VTSAX, but I really couldn’t come up with a good reason not to do the same with my two REIT funds – VGSLX and VGRLX. Especially in my case, where I have direct ownership in multiple rent houses and a commercial office/warehouse building in Dallas.

    So this morning I executed a trade to exchange everything into VTSAX. Now that’s all I own across the board in Vanguard (individual and retirement accounts). Thankfully this exchange occurred wholly in my IRA accounts as well so the tax man was unable to penalize a strategic decision.

    I guess brilliant minds must think alike~

    In all seriousness, I love that you shared this post. It shows how we should all keep an open mind, consider questions and points posed by others, and not be afraid to tweak our strategy, even when our initial decisions may be supported by some very valid points as well.

    The great news is – we have these kinds of decisions to make – what Vanguard index fund(s) should I be allocated to? I think that in and of itself puts us way ahead of the game.


    • jlcollinsnh says

      Hey Jason…

      Great to hear from you!

      I just got a reminder from Cheryl that I need to book my flights for this year’s Chautauqua. I’ll send her your regards!

      Yeah, with your direct ownership of RE, I think you’ve got that angle well covered. Cool you made the change in IRAs with no tax consequences. Us too!

      Thanks for the kind words. I’ve been thinking about this for sometime and then Paul’s question/comments brought it front and center. But what a pain trying to find and update all my posts that mention REITS! 🙂

      But you’re right, as problems go, deciding which Vanguard fund to chose is a nice one to have. 😉

  5. Andrew says

    Jim —

    For a 75%/25% portfolio, what do you think about splitting the bond portion 50/50 between a bond index such as VBTLX and P2P notes? My experience with P2P notes is that with a large portfolio of them (500+ notes, no single note exceeding $25) returns pretty safely exceed 10%. Do you think it’s smart to lump P2P notes in with corporate/government bonds?

    Currently my only reservation with P2P notes is their liquidity (though that hasn’t stopped me from investing a small portion ~3% of my portfolio in them). It may take some time and discounting to sell them if necessary, though holding 24 months of living expenses in cash drastically reduces the need to liquidate them quickly.

    I know you don’t invest in P2P notes, but what are your thoughts on this asset class and how should people who are interested in (or are already investing in) think about them?


    • jlcollinsnh says

      Hi Andrew…

      You are right, I don’t invest in P2P loans like Lending Club.

      I was tempted when I first came across them. But it seems now the sweet interest rates that were once available are now harder to come by and it seems there is some concern that these organizations might be lowering borrower standards to meet investor returns.

      I see them as a riskier kind of bond, with potentially a higher return to offset that risk.

      That said, they are not the equivalent of corporate/government bonds. Those organizations are collectively far more likely to meet their debt obligations in more hard time situations.

      For me these are beyond the Simple Path to Wealth approach we discuss here. But that doesn’t mean they can’t be part of your portfolio if you are seeking higher yields and understand their unique risk profile.

      • Andrew says


        For your bond holding I believe you buy VBTLX, I’m curious to know what you think of VBLTX instead. Expense ratio is a bit higher on this one since it doesn’t come in an “admiral” flavor, and it looks like it’s slightly higher risk but the current yield and the 10-year performance is almost twice that of VBTLX.

        • jlcollinsnh says

          VBLTX is a long-term bond fund with maturities averaging 24 years.

          Long bonds almost always pay higher interest rates to compensate for the higher risk. And since interest rates have been dropping for the last 10+ years it is no surprise they have out-performed over that time.

          But once interest rates turn up again, they’ll get killed. Very risky, especially now.

          VBTLX is a total bond index fund holding bonds of all maturities, thus spreading the risk.

          For more:

  6. DMDave says

    This is a timely post, as I’ve been trying to whittle down my portfolio positions. I thought I was smart when I started indexing, to have 3 different REIT ETF’s (I’m Canadian, so I have Canadian, US and international REIT ETF’s). After a year of indexing, I’m increasing leaning towards the idea of “simplicity is beautiful” school of thought, and I’m thinking of sitting down one day and trim back my holdings.

    The exchange between you and Paul are very enlightening, and I’ve learned a lot from your Stock Series. I’ve even directed my friends to read them when they have questions.

    • jlcollinsnh says

      Glad to hear it, DMD…

      As Paul said “(REITs) have their place in more active portfolio (say someone who does growth, value, small cap type break downs)….there they can make sense so long as you are following market conditions….)

      But that’s not the Simple Path to Wealth approach of this blog and they simply no longer fill the role for which I owned them.

  7. Clint says

    Thanks as always for your great, insightful posts, Jim. I’ll definitely look forward to hearing your further thoughts on international investing!

    • jlcollinsnh says

      Thanks Clint!

      As you know from this,
      I don’t buy into the traditional reasons for owning international funds. Plus I see additional risks in them.

      And as Paul points out international exposure “seems to correlate more and more with US performance.”

      While the idea that being invested in other countries provides a hedge against inflation/deflation in the US is very intriguing, it occurs to me that the US is such a massive portion of the world economy that were it to enter either of these spirals the rest of the world would be sucked right along.

      So, for now, simplicity wins and I’ll do without international.

      That said, I don’t think they are a bad idea and for those who like them they can certainly be a part of a Simple Path to Wealth portfolio. If I were to add them to mine they’d be 25% along with 25% bonds and 50% VTSAX.

      Further, for non-US investors, I’d say investing outside their home countries is an essential idea and the added inflation/deflation hedge very real.

      • Clint says

        For sure! I’m fully comfortable sticking with my 90% VTSAX/ 10% VBTIX allocation into 2040, but it is interesting how much the “25% international” seems to be the rarely-questioned, standard issue advice of even the most respectable investing/ indexing communities.

        Thanks for the reply!

  8. John Mark Schofield says

    You can’t possibly have a complete discussion on these kinds of issues without referencing Bernstein’s “Deep Risk” ( It covers these issues with great authority and insight.

    Basically, there is shallow risk and deep risk. Shallow risk is the kind you don’t have to worry about — the stock market will go down — but then it will go back up. Shallow risk, unless you have to sell at the bottom for some reason. Shallow risk can be mitigated with discipline and education.

    Deep risk can not, at least, not as trivially.

    The sources of deep risk are:
    * Devastation: war, primarily
    * Deflation
    * Confiscation: Nationalizing assets, excessive taxation, etc.
    * Inflation

    Bernstein discusses how to handle each of these risks. I really can’t recommend this book (and all of Bernstein’s books, but I’m a fan boy) enough.

  9. Mad Fientist says

    Great post, Jim (and Paul)! I was planning on dedicating some of the proceeds from my upcoming house sale to REITs but this article may have convinced me to change my plan. Jim, hopefully we can get together for dinner at my place sometime soon and talk more about this in person (I’ll speak to my better half tonight and will email you).

    • jlcollinsnh says

      Thanks MF…

      …and congrats on selling your house! Now free of it and that pesky job of yours, long-term travel awaits. 🙂

      We’d love to have dinner with you and, before you move, actually see this house of yours. 😉

      BTW, kudos on the Guinea Pig update:
      Awesome stuff!

  10. Michael says

    Hi Jim,

    Really love your site and appreciate the discussion on this topic. Personally, I own REITs, but in a small allocation because I have a large chunk of my overall assets directly in other real estate.

    My question is this: setting the inflation discussion aside, what about the fact that REITs have had a solid record of performance, and are not 100% correlated to returns in stocks? Seems like it might be a good reason for having a piece of them in your portfolio for that reason alone?

    • jlcollinsnh says

      Thanks Michael…

      Glad you like it!

      While REITs weren’t really serving the hedge role I bought them for, they did perform well for me. As mentioned in the post, year-to-date VGSLX is up ~15% v. VTSAX @ ~2.5%.

      So, sure. You can hold them as a diversification. As I said at the end of the post, this is a change I’m making in accordance with the Simple Path to Wealth approach of this blog. They simply no longer fill the role for which I owned them. This doesn’t mean that everyone who owns them needs to rush out and sell. 🙂

      I agree with what Paul said “(REITs) have their place in more active portfolio (say someone who does growth, value, small cap type break downs)….there they can make sense so long as you are following market conditions….”

      But that’s not the way I invest.

      If that’s the way you are investing, go for it.

    • Paul says


      I agree there’s some benefit to diversification here. I’m a fan of a really really simple portfolio though. If you’re the type who is interested in diversifying into say international stock, domestic stock, same for bonds, REITs, commodities, etc, there’s probably a good benefit from smoothing out the ride to be had.

      I’m honestly too disinterested in portfolio management to even bother with that though, I feel like a stock bond split hits the 80/20 rule for me (80% of the performance for 20% of the work).

  11. Chris says

    I agree with most being said here. Some things to think about:

    1) In the event of inflation you would want to make sure the stocks you own have pricing power, meaning they can shift their input cost increases on to the consumer in the form of price increases.
    2) You would also want to make sure if you own commodities you hold storeable commodities. Commidities that expire (ie corn) would not be a good inflation hedge. Oil, on the other hand, might pr0vide better protection.
    3) The third thing to think about are interest rates. When you have inflation the Fed & general market rates will be increasing. Sectors that are generally high in leverage (REIT’s, Utilities) will see their cost of debt increase as lower rate loans are refinanced at higher market rates. The result would be a decrease in profitablity that will squeeze possible gains on property values, rents, etc.

    Isn’t economics fun!


    • Paul says


      Point 1 is a good thing to keep in mind, but you also need to consider your time horizon.

      If you check the link I put in there on German hyper inflation and the stock market performance you’ll see poor performance initially followed by good performance.

      The poor performance initially is likely 2 main reasons. First is what you said, businesses may have a hard time adjusting short term. Second, general panic!

      Long run though all businesses prices are malleable, so we shouldn’t need to worry about input price compared to output price changes due to inflation.

  12. FloridaStache says

    Interesting post. I will preface this by saying that I am NOT an economist, nor do I even have a strong math or investing background. However, I am not so eager to part company with my REIT fund and here’s why. First of all, full disclosure- I’m allocated 50% to VTSAX, 25% International (VTIAX), 20% Bonds (VBTLX), and only 5% REIT (VGSIX), so it’s not a major needle mover in my portfolio.

    I recently read Robert Shiller’s “Irrational Exuberance,” a great book that offers a pretty convincing takedown of the Efficient Markets Theory (EMT). Basically, he demonstrates that investors, as individuals or as a whole, are NOT rational actors- that people can and do make emotional, irrational decisions regarding investing and that this irrationality accounts for quite a bit of stock and asset valuation and fluctuation.

    Even after the 2007 RE fiasco, there remains an overwhelming bias, among both the Government and many Americans, toward “investing” in real estate. I very much understand, appreciate, and agree with your article on “Why Your House is a Terrible Investment.” Yet, it seems like I can’t swing a dead cat without some friend or acquaintance criticizing my decision to rent and telling me how “great” of an investment real estate and housing is. People out in the Real World (mainly the younger folks who were not victimized by the crash) are still lining up to buy as much McMansion as the financial system will lend them. Every time I visit a major city there are new Trendy Gentrification Zones springing up, replete with self-serve frozen yogurt, Fancy Apartments, luxury yoga pants outlets, etc. In short, we have learned nothing and are still addicted to RE as a people.

    If the vast majority of the populace believes this, and the Government encourages it, then why should I not be in a position to take advantage of the upside of RE investing (the dividends, relative security/stability of real, tangible underlying assets) while minimizing the risks of RE investing (geographic specific risk, crazy tenants, etc.)? In other words, I feel like REIT investing may at some level place me on the winning end of the “bigger fool” paradigm…

    While there is quite a bit of overlap between REITs and the total stock market, that overlap (correlation) is not 100%- as you pointed out in your post, they have turned in different performances so far in 2014. Granted, that spread may thin out over time, but still, they are not 100% positively correlated. Thus, I believe that REITs offer some (slight) diversification benefit in a portfolio.

    Also, the dividend payout is worth something- even if the share price is down, you are still getting SOME income from the asset- a reassuring concept.

    So my point here is not to wave pom-poms for REITs or even challenge your decision to allocate away from them, but rather to present some additional considerations to ponder before this article causes a massive outflow from the Vanguard REIT index funds 🙂

    • jlcollinsnh says

      Hi FS…

      First, I’m flattered you think anything I say here could move markets. 🙂 🙂

      You make an excellent point regarding the favored status the government accords RE and a great case for their value in diversifying a portfolio. As Paul said “(REITs) have their place in more active portfolio (say someone who does growth, value, small cap type break downs)….there they can make sense so long as you are following market conditions….”

      I agree, but that’s not the Simple Path to Wealth approach of this blog and they simply no longer fill the role for which I owned them.

      Doesn’t mean you or anyone else need rush out to sell. (Unless I really do out to have that market moving power. 🙂 )

      Plus I still have some: ~3% of the VTSAX portfolio is in REITs.

    • Paul says

      I agree with your analysis as I mentioned in the post. Right now we are on a home ownership kick and the government is supporting that idea. If you think that’s going to continue, holding REITs is a good idea.

      It gets back to the final point I made that Jim mentioned: If you’re a more active investor and following trends, REITs have a well deserved place in your plan. If you’re investing and don’t want to think about it for another 15-20 years, I’m not sure they add a huge amount.

  13. Jon says

    Now you’ve done it Jim…this will no doubt cause a mass exodus from the Vanguard REIT fund I own 🙂 ( as mentioned in the previous post above as well ). This topic is timely, as most if not all of yours are. I’ m somewhat in the unfortunate position of owning this index fund in a taxable account. So therefore…I will most likely do nothing and stand pat. Thanks as always for your sage humility and transparency….you continue to help so many of us.

    • jlcollinsnh says


      You and FloridaStashe seem bent on conveying a power to me I don’t have and that would be dangerous in my hands. 🙂

      (although VGSLX did plunge a full .68% today) 😉

      That said if you (or anyone else who owns REITs in a taxable account and is sitting on substantial capital gains) want to step away, you’d likely be best served by doing it slowly over time.

      As I’ve discuss elsewhere on the blog, when I retired I still owned some investments that didn’t fit The Simple Path to Wealth. When my earned income went away I simply sold out of these first as we started living on the portfolio.

      But as I said above and in responding to some other comments, you shouldn’t feel the need to dump your REITs in a rush based on this post. 😉

      Thanks for the kind words.

  14. TK says

    I checked Vanguards website for the average annual returns of VGSLX and VTSAX….funny thing:

    1 yr 0.97% 20.73%
    3 yr 9.76% 13.55%
    5 yr 22.71% 19.65%
    10 yr 10.48% 8.29%

    10 years isn’t enough of a history in my mind but is enough to have been through a bunch of ups/downs/sideways… I think the above may warrant additional research. It doesn’t answer the inflation hedge argument but the total return argument may help with that (i.e. if you get a few bps more in return that helps offset inflationary pressures). Aside from that here are some thoughts:

    Inflation – REITs employ quite a bit of leverage so if inflation occurs for positive reasons then rents will rise (so will expenses) and ultimately property values and the debt will be repaid in more valuable dollars.

    Market Correction/Crash – REITs are required to pay out their income resulting in higher yields so during a downturn the cash flow smooths out the ride and from a practical perspective keeps management honest as they really have to be judicious in use of capital.

    Deflation – not good for REITS.

    • Paul says

      Personally I’m very uncomfortable assuming anything from the past 10 years of REIT performance. My opinion, as I hinted in the post, is that the real estate market is heavily distorted right now (since the mid to late 90’s).

      There’s also the point that the past is no guarantee of the future. I’m quite confident the total value of the stock market will have good returns. REITs should be good, but it’s a lot more like asking me if I think the banking sector or precious metals will do well. I don’t really know.

      • TK says

        This part of your response makes a lot of sense to me and is the basic premise of setting and forgetting with an index fund.

        “…..but it’s a lot more like asking me if I think the banking sector or precious metals will do well. I don’t really know.”

        I may be misreading your comments but what see is that your thesis/argument is based views of housing. Until very recently there were no housing REITs – REITs are typically owner/investors of commercial real estate (office buildings, retail centers, apartments for rent, hotels, health care properties, etc.) I think you are confusing the two.

        So while I agree with you that the housing market may be somewhat distorted for one reason or another I don’t the same in the commercial space (other than low interest rates which benefit the broader market as well).

        I qualified that 10 years is not enough, and if I can find more time I will do more digging, but you have to keep in mind that during that 10 years REITs went up and down like the broader market. The basic premise is that REITs like stocks in the broader market are valued based on the present value of the expected future cash flows (profit, growth, interest rates, etc).

        That said since the have become a more accepted asset class in the last 15 years they are more correlated to the overall stock market.

        • Paul says

          There’s a very good chance you are right. I haven’t considered much the balance of commercial and residential nature of REITs.

          That’s partly my point though, REITs are a specific sector in my mind. I don’t know what banking is going to do and I don’t know what REITs will do. I haven’t looked in enough detail to know.

          That’s why I think they have a place in the more involved investors portfolio, but probably don’t add much for a lazy investor like me. As Jim has pointed out the total market index contains some exposure to REITs. I’m comfortable with my prediction that the value of the total market will go up. I’m not comfortable with any forecast I would give on REITs.

          My initial consideration that spawned this discussion with Jim was as an inflation hedge and based on the conversation he posted, I concluded they aren’t adding value to my portfolio that way. I am a truly lazy investor, and if I can get a 2 fund portfolio that is expected to meet my risk/return criteria, I’m very happy with the simplicity.

  15. greg says

    Thomas Piketty of recent “Capital in the Twenty-First Centry fame” points out that the share of wealth allocated to housing has exploded while the portion of agricultural land has all-but-disappeared, and he has lots of data and is pretty open about sources.

    So there was a fundamental shift. But there may also well be a next one. However, this might be a more macro, longer-term insight that can help look at skepticism around real estate in new ways.

    Re: “Any capital gains rely on changes in demand and supply rather than fundamental increase in productivity” — true, but there was also a very substantial, fundamental re-characterization of the balance of wealth starting many decades ago that realized very high returns at some points.

  16. Wim says

    As a european investor I’m currently invested in the “Vanguard all-world” ETF.
    The fund itself reports in USD but I’m invested in the EUR listed version.

    In case of hyperinflation, will I receive the full benefit of an internationally diversified stock portfolio as you mention in your post?

    My guess would be that the underlying stocks bought with foreign currency will be worth a lot of dollars which in return will have a positive impact on the value of the fund.

    but I’m no economist so I appreciate your thoughts on it

    • jlcollinsnh says

      Well Wim…

      I’m no economist either. 😉

      but here are my thoughts:

      The idea behind international investing being a deflation and inflation hedge is that those events tend to effect single currencies and countries. So, yes, since the Vanguard All-World fund invests in many countries it should serve that purpose.

      However, that fund, assuming you are referring to VEU, does not hold USA stocks. It is “FTSE All-World ex US Index” Since the US is such a large portion of the world economy, this is a serious omission. This is a fund best suited, in my opinion, for investors already holding US stocks.

      You’d be better served with something like VT — — which holds stocks from all over the world including the US.

      Confusing, I know. 🙂

  17. femmefrugality says

    There is so much good time info in here. A lot for me to digest, but I wanted to let you know I am digesting it. Your posts educate me so much, and I often feel guilty that I don’t have a lot to contribute in return. So just saying thank you for educating!

    • jlcollinsnh says

      Thank you, FF…

      That’s very kind of you to say, and it is always an honor to have you comment here!

  18. DMDave says

    Saw this post on another blog, about inflation, money illusion, and stocks:

    Seems the author pointed out (with lots of academic references) that any sort of inflation will be good for long term stock holders. I’m no economist, but what I gather is that during period of high inflation, corporations are able to increase their revenue, so even though the nominal return is higher, the real return remains the same. The stock market will also reflect the higher inflation and higher nominal return with higher price, without specifically accounting for higher inflation.

    Looking at the metrics of the stock market during high inflation, investors would think that since the stock market has been going gangbusters, the future returns will be lowered, thus consider the stock market to be over-priced and cash out. It will in turn cause the stock market to be on discount.

    It seems like periods of high inflation (or even hyperinflation) could be beneficial to long term investors to load up on discounted stocks. What are your thoughts, Jim?

    • DMDave says

      Money illusion: Investors only look at nominal values, and can’t differentiate an increase in fundamental from an increase from inflation.

    • jlcollinsnh says

      Hi Dave…

      In general, I agree that inflation can be good for business and is certainly better than deflation. Businesses can raise prices and wages and still post higher profits for investors.

      This is why the Federal Reserve has been working overtime to ignite some inflation into the economy.

      The problem come with hyper-inflation: When the price of goods is rising so fast business can’t keep up. Or, to look at it another way, when the value of the currency is falling too fast to keep up.

      If, for example, the dollars you take in today are instantly worth 20% less a day (or a few hours!) later, there is simply no way to keep up.

      The really ugly part comes when people, recognizing this, try to keep up by anticipating the lower value and charging higher and higher prices. Soon the economy is locked in an inflationary spiral and everything grinds to a halt.

      Currency becomes essentially worthless as no one take take the risk of accepting it in trade for goods. Until it gets sorted out the economy is reduced to a barter system of goods for goods. Highly inefficient and very bad for prosperity.

    • Paul says

      I think the key to remember is that the real performance of the company in the long run is based on fundamentals and not inflation or deflation. Inflation is just a nominal metric. People might be fooled short run thinking it is increasing earnings, but as they realize their dollar is buying less, it will get priced in to the stock.

      You might have short term dips and gains due to high inflation, but after some time it will smooth out. You can see this in the link in the post about the German market performance during their hyper inflation. It was extremely volatile during this time, but long run if you held, you did fine (and exceeded inflation).

      Hyperinflation will never be beneficial in the long run though just because it is a huge signal distortion. Times like this you will get malinvestment due to the price and interest signals being unreliable.

  19. Andrew says

    REIT mentioned as investment strategy in your Investing in a Raging Bull post: “At this point, shift some of your assets to Bonds (unless of course you already have them in VBIAX) and REITs. This will smooth the ride even as it lowers your performance. A trade you now want to make.”

    • jlcollinsnh says

      Thanks Andrew…

      I’ve been trying to update the other posts to reflect this change but clearly I missed this one. Please let me know if you spot any others.

  20. Jeremy says

    Hi Jim

    I’ve been a long term holder of REITs, but for different reasons. I haven’t really thought of them as an inflation hedge, but as a source of income… in other words, they are part of my bond portfolio, but with better characteristics than bonds

    I expect the REITS to perform at about the same rate as inflation, but to continue to be able to grow rental income over time. It’s a way for me to be a landlord without any of the hassle.

    That said, I’ve held about an 80/20 stock / bond portfolio for awhile (with REITS part of the 20%.) I’ve considered moving that to 100% stock, since our dividend and interest income pays all of our expenses. If our income was less, requiring some asset sales to fund day to day living, I would definitely stay at 80/20 and continue to view REITs as a source of income

    Kudos for making changes and for sharing them with us!

    All the best


  21. 2l2r says


    Thanks again for the work, was looking forward to this piece for a while. If I may can I have you thoughts on this guy’s ideas, he mentions MMM in his pieces and is an early retiree so would be in our corner so to speak.
    He is a big fan of the IVY league portfolio which is a little bit more hands on than B&H especially the timing version, but the returns are impressive and more importantly the maxDD over the years reported was an eye opening -4.17%.

    As a result this model supports some impressive SWR’s

    I’m hoping you will throw a big BUT into the mix so I can stick with the lazy friendly 80/20 B&H and forget I ever seen this.

    thanks – looks like you guys had another great trip

    • jlcollinsnh says

      Hi 2l2r…

      I’m afraid I’m going to disappoint you.

      Occasionally I get these kind of requests to read some book, article and/or blog and dispute the ideas in them. Initially, I invested some time in trying to be responsive. But the truth is that I’ve been investing for close to 40 years and in that time have read countless pieces on countless strategies. I’ve discounted all but those I present in this blog.

      The newer ones I’ve seen are all variations on past themes. Been there, done that. Perhaps something truly new and revolutionary will make its way onto the scene. Should that happen I’m confident I hear of it from multiple directions.

      If you read my blog you should have a very clear idea of my views. You can then read other sources, compare and decide for yourself what sources resonate. 😉

      Good luck!

  22. Ron says

    Hi Jim,

    A year ago you gave me some advice regarding my mom’s portfolio:

    I didn’t realize you made a separate blog post about it until a month ago!

    We followed the advice (including REITs – VGSLX) and now your advice has changed.

    Her portfolio has grown in large part due to VGSLX which seems to have outperformed VTSAX by a large amount in the past year.

    2 questions:
    1. Do you have any regrets about changing your strategy?

    2. Are we running a risk by staying in it while it is performing so well?

    Thanks so much for your advice. Everybody has been really happy with it.


    • jlcollinsnh says

      Hi Ron…

      Glad you finally found the post about your mom’s case study. Who knows, it might even make its way into a future book I’m considering on the case studies. But that won’t be until after my first book is out hopefully later this year.

      Anyway, I assume you’ve read this post and understand why I’ve stepped away from the REITs. And you should also understand it was not because they are awful to own. They just don’t fulfill the role for which I had owned them.

      As you observe, since then REITs have been on an absolute tear. So, as to your questions:

      1. Sure, I wish my timing had been better and I had enjoyed that run up. But I also understand that, since timing can never be predicted, that is only a matter of luck. Meanwhile, I am very comfortable with my decision for the long-term.

      2. Sure, you are running a risk. But, again, no one can predict the timing. They Could out-perform this year as well. But at some point, they will revert to the mean.

      So the real question is why do you hold them? If it is in the hope that they will again out-perform you are taking a gamble that may or may not pay off.

      If it is for the reasons I used to, well those have changed.

      One question to ask is, if you didn’t own them would you buy them today?

      My answer for VTSAX and VBTLX is yes. For VGSLX it is still no.

      But that doesn’t mean they can’t have another kick-ass year. 😉

  23. Drharhar says

    Good morning!
    I recently finished a second reading of the SP2W. Loved it. Amazined how much I missed the first time. I think this second time around I have a much better idea of the difference between market timing vs. investing.

    I was wondering if you had any more thoughts on using international as a inflation and deflation hedge. In the above post you seem undecided, and I’m wondering if you’ve landed on one side or the other (I’m guessing your still all VTSAX). It just seems vanguards total international stock fund, while having a higher expense ration, would out pace their US bond fund in growth; hence providing stability and growth.

  24. Big Mike says

    Do you consider home equity when you determine your 4% rule. I assume we will sell house in retirement, rent in late 70’s. I can not find any write up on it, but saw you mentioned home equity in your real estate numbers.

    • jlcollinsnh says

      This is a question everyone answers differently.

      For me it depends.

      For those who plan to live in their house forever and can’t imagine moving or selling, I would exclude the equity from my calculations.

      For those who would sell thier house without a second thought if needed, I would include the equity.

  25. G Man says

    So I currently invest 100% of my roth ira in the VGSLX, would you recommend switching to VTSAX for my roth as well? I have a traditional brokerage that is 100% in VTSAX and my 457b in low cost index funds as well. Currently maxed out all accounts and putting the rest away in my VTSAX!

    G Man

    • jlcollinsnh says

      That’s entirely up to you, G Man.

      Personally, I no longer hold REITS for the reasons outlined in the post above.

  26. Will says

    FA here, would just like to point out REITS dividend are taxed as ordinary income, not capital gains. So if you might want to consider holding them in a Roth style account. Also REITS by rule I believe have to pay 90% of revenue to shareholders. That is what really separates them from a Corp is that distinction (for our investing purpose, tax savings on the business side for them). *Disclaimer not investment advice, put REITS wherever you want, just adding something to look into.

  27. Gareth Ghost says

    You made some passing comments regarding Harry Browne’s Permanent Portfolio. Have you ever had a look at the Portfolio Charts website? One of the (many) interesting snippets of information is a comparison of the Safe Withdrawal Rate of numerous well known portfolios. Because of the low volatility of the PP, it had the highest SWR. This makes it very interesting to retirees. There are other portfolios (Golden Butterfly, Pinwheel) which are based on it, but with a lower allocation to gold for those uncomfortable with a 25% allocation. These also have high SWRs. The lowest SWR belonged to the Total Stock Market (100% stocks), despite its highest expected return (good for accumulation, bad for deaccumulation). All very illuminating.

    • jlcollinsnh says


      Because I no longer invest in REITS?

      I note that in the addendum after the post.

      Or was it something else?

  28. Nathan Sherwood says

    Hi Jim,

    I’m a big fan and love your book! I agree with all of your talking points on REITs. The way I think about it, by definition, VTSAX is essentially the U.S. economy. Because VTSAX is the economy, it includes all the great money producing businesses the country has to offer as publicly traded stocks. Looking at the sector breakdown of VTSAX, it looks like the REIT sector is about 3.61% of the total fund. If REITs were a larger and more profitable part of the economy, there would be more and larger market cap REIT companies as part of the total stock market. By owning the total stock market, we own higher percentages of the most profitable businesses and sectors by default. Just my thoughts.


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