neroground.blogg.se - Real estate reit max drawdown

It is easy to brush off that you can endure a 30-50% draw down on a portfolio that is 10 times your annual savings rate, until you do it. If the volatility is small, but the returns are slightly lesser, you keep your mind, and your mind will tell you that this is the opportune time to add more to cheaper positions. Whether it is portfolio 1 or 2, you realize that for a lot of those crisis, the draw down might be much more manageable in the behavioral sense. When we see our position in a money losing situation in the absolute sense (compared to in percentage, like losing 10 years of hard earned savings), it makes us do stupid things like pulling out the money at the absolute wrong time. Imagine painstakingly building up $500,000 over 20 years and seeing that cut by $250,000 (see portfolio 3 in subprime and dotcom)

Why are Volatility and Drawdowns an Issue?īecause they affect human beings. Portfolio 1 has less gold than portfolio 2, and we can see that the draw down is larger without gold. Subprime crisis, is also a crisis of the equity market, real estate market, and the credit market. We notice that the draw down for portfolio 1 is usually greater than portfolio 2. In most periods, the draw downs of the permanent portfolio, be it portfolio 1 or 2, was able to reduce the draw down to a manageable level. The table below shows the level of drawdowns for the three portfolios in some of the tough periods:

The long term compounded growth is not too shabby.

But if there is a draw down, it might be much worse.

Replacing gold with REITs improves the return per unit risk (Sharpe ratio) and the volatility profile (Stdev). But it should be good enough for most people.īy reducing gold, the max draw down is higher (portfolio 1 vs portfolio 2). You would notice that the compounded average growth (CAGR) is slightly weaker than a pure US Stock Market portfolio 3. The third portfolio is a pure 100% US Stock Market. The second portfolio halve the US Stock Market and puts it in REITs: The first portfolio halve the gold and puts it in REITs: The author decide to do 2 portfolios by adding the US REITs index. This is to say there are periods in the past where inflation was high, but gold didn’t do as well. Given another period with different permutations, and their results might be different. There are evidence that gold was able to do well then, because their valuation due to the purpose they performed, is cheap. But I would caution for us to conclude that just because gold and real estate did well during those period, that in a seemingly similar period next time, they would perform as well. Real estate, was able to do pretty well during that 1970s period.

Without these periods, I think the safe withdrawal rate can be much higher. And that is those 30 year periods that starts in 1966 to 1969. If there is one period that we should fear it is the stagflationary period in the 1970s.įrom my research on retirement and financial independence, there is a few 30 year periods that resulted in the safe withdrawal rate to be 4% or less. However, I do think that interest rates, which is a cost of securitized real estate borrowing will go up as well, counter balancing the advantage in #1.Real estate value tends to go up in inflationary scenario.The author seem to agree that there are some characteristics of real estate that would make it work like gold in certain regimes: Gold does not provide a income or yield per say.So his portfolio is tilted towards:Ī reader thinks that the portfolio is too heavy towards gold.Īnd there might be a justification for it because: In Demonetized, he thinks that the problem with the permanent portfolio is a lack of equities, and too much cash. The standard deviation is low at 4.35% as well. What you will notice is that while the CAGR is pretty good, the max drawdown (MaxDD) is the lowest at -12%.