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Matt Kaplan: Recently, I had a call with an investor who-- They were listing out all the things that we have in the portfolio. Stocks, bonds, energies, grains, metals the whole gamut, and the topic of real estate came up. It would be helpful for you to share your take on real estate in the context of an all-weather portfolio.

Eric Crittenden: A definition of real estate is relevant here. We're here in Phoenix/Scottsdale, Arizona so if you talk to 10 different people and ask them what real estate is, you're going to get 10 different answers. But from the perspective of a typical investor, we can essentially assume that we're talking about REITs. Whether that's residential, commercial, or a broad-based REIT index. Something like a REIT ETF or a REIT-based mutual fund. I spent a lot of time looking at these historically and the returns have been pretty good for the past 20, 30 years. Not the most tax-efficient vehicle, but the returns have been impressive.

The problem with real estate at least in this format, in an ETF or a mutual fund structure, the correlation with the stock market is very high, especially when the stock market's going down. When you combine that with the tax inefficiencies of investing in real estate and you're looking at after-tax, after fees, after transaction costs, and after inflation, easily accessible real estate via an ETF or mutual fund wasn't meaningfully different from just simple market-cap weighted equity, whether it's US or global. A lot of those perceived advantages go away after you account for all the frictions of investing and I just didn't see and I've never seen meaningful diversification from real estate. So I’m somewhat perplexed as to why people feel like REITs and real estate are alternative investments.

They certainly are not very alternative when you need them to be. When you're in a recession or the stock market's going down, at least the empirical data says that they're highly correlated with risk assets when risk assets are going down. Empirically speaking, there's just no benefit that I could see from adding them to the portfolio in any form.

Matt: Can you simplify how you determine if real estate adds value to the portfolio?

Eric: If you were to combine assets and just simply look at the performance of the portfolio historically and you can do lots of different things. You can run a financial plan on it, Monte Carlo simulation, there are all kinds of different ways to look at the data. They all basically tell you the same thing and that is: do these different individual assets contribute to the health and stability of your portfolio, or do they not?

What you'll find is 90% of the assets available contribute to the returns, but at the cost of increasing the risk. If you stuff real estate via a REIT ETF or Mutual Fund in the portfolio it tends to enhance the returns, but also increase the risk because it's very redundant with what most people already have in their portfolios. It's not really a diversifier and my definition of diversification is something that takes away the sting during the bad times, something that helps when the ship is sinking, something that helps when you need it and real estate is not that thing.