classify investments in to different asset types

Question

I am trying to do a portfolio re-balance starting this year. To do that I want to divide my investments into different asset buckets. I have chosen to use the following type of asset allocation --

• Stocks (Large, Mid, Small)
• Fixed Income (long ,mid, short term)
• Real Estate
• Precious metals
• Cash

In which asset class should I include a

1. REIT mutual fund. Stocks (because its actual owing stock in different REIT companies) or Real Estate (because its actually tied to ups and downs of real estate)
2. Certificate of Deposits. Bonds (because it pays a fixed amount every year) or Cash (because its principal amount will never decrease and I can withdraw it or use it anytime I want if I don't care about the interest penalty?)
3. Self occupied house. Real Estate (because if needed I can sell and realize its value) or not consider it as an asset at all?
4. Foreign stock mutual fund. Stocks(because its just like owning stocks of domestic companies) or create a new asset class for Foreign stocks?

Answer 1

REITs can be classified as equity, mortgage, or hybrid. A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Trades like equity but the underlying is a property ot mortgage. So you are investing in real estate but without directly dealing with it. So you wouldn't classify it as real estate.

CD looks more like a bond.If you look at the terms and conditions they have many conditions as a bond i.e. callable, that is a very precious option for both the buyer and seller.

Self occupied house - Yes an asset because it comes with liabilities. When you need to sell it you have to move out. You have to perform repairs to keep it in good condition.

Foreign stock mutual fund - Classify it as Foreign stocks, for your own good. Investments in a foreign country aren't the same as in your own country. The foreign economy can go bust, the company may go bust and you would have limited options of recovering your money sitting at home and so on and so forth.

Answer 2

A foreign stock mutual fund definitely belongs in stocks. It's composed of stocks.

Your self occupied house is definitely real estate. You don have to keep in mind,however that selling it would create costs such as rent. I wouldn't leave it out, if doing that would cause you to buy more real estate. This would cause you to be overweighted in the real estate area.

I would tend to think if a CD as cash. While it could be considered a bond, as you said the principal doesn't go down.

The REIT is the toughest one. I would really like to see a graph showing how correlated it is to the real estate market. That would determine where I would put it.