Previously we discussed the concept of “Opportunity Cost”. If you choose to do one thing, you forgo many other choices. This “cost” is true whether it is money, time, or any other asset.

We talked about the opportunity cost of going on a ‘once in a lifetime’ 10 day trip to the 75th anniversary of D Day on Omaha Beach in the middle of our Valencia house deal. We talked about the opportunity cost of buying a classic car in 1984 for $10,000.

Here are the other 9 investment options, in (perceived) order of risk to capital:

  1. Cash
  2. US Treasury Note
  3. Bank Certificate of Deposit (CD)
  4. A Bond Mutual Fund (VBTLX – Total Bond Market Index Fund)
  5. A Stock Mutual Fund (VTSAX – Total Stock Market Index Fund)
  6. A REIT Mutual Fund (VGSLX – Vanguard REIT)
  7. Crowdfunding (a real estate play)
  8. Gold
  9. Angel Investing (investing in startup companies)

Today we are talking about a REIT Mutual Fund.

First, what is a ‘Mutual Fund’?

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.

So, what is a REIT Fund?

What Is a Real Estate Investment Trust (REIT)?

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.

A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing properties.

REITs generate a steady income stream for investors but offer little in the way of capital appreciation.

Most REITs are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments).

REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.

In other words, a REIT is another way to invest in real estate. The REIT managers do all the work and you collect the dividends. It’s a hands off way of investing in real estate. But there are pros and cons:

Specifically, we chose the Vanguard Fund “VGSLX – Vanguard REIT” because of the low expense ratio, see below.

This fund invests in real estate investment trusts—companies that purchase office buildings, hotels, and other real estate property. REITs have often performed differently than stocks and bonds, so this fund may offer some diversification to a portfolio already made up of stocks and bonds. The fund may distribute dividend income higher than other funds, but it is not without risk. One of the fund’s primary risks is its narrow scope, since it invests solely within the real estate industry and may be more volatile than more broadly diversified stock funds.

“The Vanguard REIT fund is the largest of its kind by a wide margin. And I’d call it the best of the similar REIT ETFs and mutual funds. It has a low expense ratio and provides broad exposure to the real estate sector.”

Why Vanguard? Two well-known FIRE bloggers can explain it better than I can:

‘Mr. Money Mustache’ who I highly recommend for his financial insights …

…recommends Vanguard:

For most of my investing life, Vanguard was THE one-stop shop for index funds of all types. They have the lowest expense ratio and the utmost respect for their customers. In fact, the company is legally structured as an investor-owned entity, meaning its responsibility is to YOU as opposed to an outside group of shareholders. Read around all you like – the smartest investors will generally recommend Vanguard funds.

Another blogger, ‘My Money Wizard’, explains five reasons to go with Vanguard:

  1. Vanguard funds are cheap [low expense ratio]
  2. Vanguard is different – they’re owned by the investors
  3. Vanguard’s mutual funds are the most tax efficient funds in the world.
  4. Vanguard created the index fund
  5. Speaking of that Jack, he’s one of the few good guys in the world of finance

By low expense ratio we mean 0.12%.  That’s why we go with Vanguard. Here’s some interesting information on the late John “Jack” Bogle who founded Vanguard and is the father of index investing.

Note that VGSLX is also available as an EFT. What is an EFT?

For our purposes, they can be considered effectively the same. But’s here is more if you are interested:

Mutual funds usually are actively managed to buy or sell assets within the fund in an attempt to beat the market and help investors profit.

ETFs are mostly passively managed, as they typically track a specific market index; they can be bought and sold like stocks.

Mutual funds tend to have higher fees and higher expense ratios than ETFs, reflecting, in part, the higher costs of being actively managed.

Where do REIT funds fall on the risk (perceived or real) scale. Long term, we think that holding real estate in the form of a REIT or equivalent EFT is relatively low risk. If the economy is doing well and we do not have a general societal breakdown, real estate will do well and the price will appreciate, certainly in line with inflation.

What is the difference between a REIT and an actual rental house?

 

 

 

For the next Opportunity Cost option, we will have a second look at two of our options: Crowdfunding and Angel Investing. For the Second Anniversary (March 2021) of TheMonopolyProject, we will also talk about some changes to the nine alternative investments to The Monopoly Project.

We started TMP on March 1, 2019. On March 1st, 2019, all 10 investments started at the same nominal value, $100,000.