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User 106682
1 Comment
Real Estate: How Far, How Fast?
Great article. I have a hypothetical question. Say that one is an investor with a well diversified retirement portfolio, 15-20 years out from retirement, has roughly 10% of that portfolio in a REIT fund--and is basically an "average" investor: not too conservative, not too aggressive. Our hypothetical investor is also good at rebalancing his portfolio, once a year or whenever something gets more than plus/minus 10% out of whack...to maintain a well designed plan for diversification.
Given the recent downturn in REIT funds, and the likelihood of more decline, as you outline above, my hypothetical investor should -- to remain true to the definition of rebalancing -- be incrementally moving gains from other funds into the declining REIT fund. Sell high and buy low, right?
My hypothetical investor's question is this: How does the investor know when the common wisdom about rebalancing, as described in paragraph 2 above, does not apply? If the investor had a 100-year time horizon, the answer would be easy--if the diversification is correct for him/her, maintain it. But with a 15-year REIT downturn appearing possible, does the conventional wisdom go out the window in the specific case of REITS and right now--summer 2007? (And also assuming that our investor understands that a 15-20 year time horizon can translate to a 45-year period of time during which the retirement portfolio is turned liquid--i.e., spent.)
Your thoughts?