Question: I have dropped commodities for the “well rounded portfolio” and embrace pretty much what you have advised here in this November post. But you don’t mention REITs [Real Estate Investment Trusts]. I still have about 8% in REITs but am thinking of selling those as well. Thoughts?
Answer: REITs are businesses, so they fit into the category of equity exposure, which I like to see in a portfolio. They also sometimes do well during bear markets in stocks due to the unique factors affecting real estate. I see no reason to sell them (especially if there are tax consequences).
At the same time, I don’t want anybody to get too caught up in the trees while missing the forest of a solid long-term portfolio. It should be:
- Focused on equities — as the late John Templeton put it: be an owner not a loaner — and
- Diversified by industry and geography — no bet big enough to hurt you in a single company, industry, or even country.
Sure, it would be nice to optimize expenses, taxes, and correlation between investments, but I believe do-it-yourself investors should focus first on their careers, spending, and saving habits in order to maximize net contributions to their portfolios before they worry about whether their globally diversified equity portfolios can be marginally improved with alternatives.
Wealth-building still just boils down to spending less than you earn and putting the difference into things that are likely to go up over time, while protecting adequately against the major risks that could derail your plan before you achieve financial independence. With respect to investing itself, the two major risks are inadequate exposure to equities and excessive concentration. Take care of those, and you pretty much have my blessing on the details.