a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_7ZckZ-8naz0/SURMYd2MuSI/AAAAAAAACPg/yJrBWZdBMAA/s1600-h/Fenway+028.jpg"img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer; width: 400px; height: 300px;" src="http://4.bp.blogspot.com/_7ZckZ-8naz0/SURMYd2MuSI/AAAAAAAACPg/yJrBWZdBMAA/s400/Fenway+028.jpg" alt="" id="BLOGGER_PHOTO_ID_5279428646397589794" border="0" //abr /Barron's had a href="http://online.barrons.com/article/SB122912511986803009.html?mod=9_0031_b_this_weeks_magazine_mainamp;page=sp"an article about reallocating retirement portfolios/a that have been derailed by the current bear market. There were comments from people citing statistics that have favored certain asset classes before and presumably these folks were relying on these statistics again. For example there was a quote about buying REITs when they yield more than ten year treasuries and that currently (per the article) REITs yield three times that of treasuries. The obvious question not addressed was whether the folks quoted bought REITs when the yield first surpassed the yield on treasuries. That would seem to be the implication and so as that was wrong how do we know that now it would be right?br /br /A case was made for various segments of the ...

“Not all REITs are created equal,” notes income expert Richard Lehmann.  Here, he takes a look at the Neuberger Berman Real Estate Income Trust in his Forbes Lehmann Income Securities Investor.

“The decline in Real Estate Investment Trusts (REITs) has been sharp, reacting to the mortgage crisis and the associated financial meltdown. However, here are sectors of the real estate market that have not been affected by the mortgage crisis.

“Such sectors like health care and multi-family projects and self-storage buildings are relatively less sensitive to the economic cycle. In addition, these sectors may have an inverse benefit from foreclosures such as rental properties and self-storage.

“The Neuberger Berman Real Estate Securities Income Trust fund invests in REITs in defensive areas such as health care and multi-family projects. Common stocks of REITs are trading at a discount to the properties they own, a reversal of premiums evident in last year.

“This closed

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The four big asset classes are stocks, bonds, cash and real estate. Direct ownership of real estate is the pure form of the asset class. To achieve diversification within the financial capability of most investors, securitization of a direct real estate portfolio (REITs) is a second best solution.

REIT vs REAL ESTATE FUNDS:

The problem with publicly traded securitized real estate is that it takes on some of the characteristics of stocks, and loses some of the distinctions of the direct real estate asset class. Except in bubble times, the yield of REITs also tends to make them trade a bit like bonds. Overall, REITs are hybrid in nature, but still generally thought of as a separate asset class more than as a separate sector within the stocks asset class.

Because REITs are not as widely authorized internationally, and because of investor demand …

It is ironic that US REITs year-to-date have outperformed US stocks, non-US developed market stocks, and emerging market stocks, as well as directly owned commercial and residential real estate. Only commodities have outperformed REITs so far this year.

VNQ, ICF, IYR and RWR are still down from 17% to 20% on a trailing 12-month basis, but they provide a 12-month distribution yield of from 3.90% to 4.75% which is more than the current 10-year T-Bond rate of about 3.70%.

How vulnerable REITs are to a reversal of fortune is unclear.  If the economy is as vulnerable to major recession as some say, the rental income of REITs may not prove as strong as expected, which would tend to lower the distribution yield.  Continued outperformance itself, would reduce the yield rate.  …

It is ironic that US REITs year-to-date have outperformed US stocks, non-US developed market stocks, and emerging market stocks, as well as directly owned commercial and residential real estate. Only commodities have outperformed REITs so far this year.

VNQ, ICF, IYR and RWR are still down from 17% to 20% on a trailing 12-month basis, but they provide a 12-month distribution yield of from 3.90% to 4.75% which is more than the current 10-year T-Bond rate of about 3.70%.

How vulnerable REITs are to a reversal of fortune is unclear.  If the economy is as vulnerable to major recession as some say, the rental income of REITs may not prove as strong as expected, which would tend to lower the distribution yield.  Continued outperformance itself, would reduce the yield rate.  Rising interest rates due to inflation* could reverse the yield spread between REITs and T-Bonds, which would take steam from the REITs.

*

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One of the principal reasons for asset allocation is risk management. 

Market risk is generally defined as return fluctuation – volatility.  That is different than issue risk (the risk of owning a single stock or bond issue), which includes not only volatility, but also the risk of company bankruptcy or default on bonds.

While most investment professionals understand and take the risk reduction aspect of asset allocation for granted, that is not the case for all investment advisory clients.  We have been asked on more than one occasion, how we know that to be true, and for some evidence of that truth.

There are probably many ways to respond to that question, one of which is with a practical example with real market data.  We have created one such example for this article.

The image below shows the relative weekly return and weekly rate of change of six index investment funds representing six major

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As you select asset classes and class weights for your portfolio, you should take into consideration, among other things, the mean return of those classes over different periods of time.

History is no guarantee of the future, but lack of understanding of the past may result surprising returns. It’s a good idea to do all you can to minimize surprises.

The chart shows the relative 1, 3, 5 10 and 15 year annualized returns for six major asset classes. The key feature to observe is the relative size of the return for each class within each year.

You can see bonds as a low return, but stabilizing asset class. You can see the US market has been weak relative to foreign markets. Commodities have been strong. Real estate did well, until it fell out out bed in a major way during the last 12 months.

A representative (but not exhaustive) list

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