In this podcast, we look at how you can increase your returns without increasing the overall risk to your portfolio. I call it the asset class swap, and it’s incredibly easy to do. Here’s how it works.
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%.