From time to time an asset class becomes significantly overvalued or undervalued. This happened last year with REITs. The Vanguard U.S. REIT index fund (VGSLX) was up more than 30% in 2014 and its P/E soared to more than 40. In contrast, Vanguard’s global REIT fund (VGRLX) was up less than 3% and had a P/E under 15.
At the start of the year, 10% of my portfolio was in REITs. Fifty percent of this allocation was in the Vanguard U.S. REIT fund, and 50% was in the global REIT fund. Because of the valuations of each of these investments, I transferred the money in the U.S. REIT over to the global REIT.
My asset allocation hadn’t changed. I still had 10% of my portfolio in REITs. But now it was all in a global REIT fund. The decision wasn’t based on a prediction of future prices. It was based entirely on valuation.
So far it has paid off. The U.S. REIT fund is off 1.72% this year, while the global fund is up 7.52%.