I’ve been putting some side money into crowdfunded real-estate investments – see here and here – and I have decided to test out the quarterly liquidity window of my Fundrise eREIT investment (review). An important difference between most of these private real estate investments and publicly-listed REIT is liquidity. On most any given weekday, I can sell my public REIT (i.e. VNQ) for a price that an open market deems fair and within few days I will have cash in hand.

The Fundrise Income eREITs are private REITs that take advantage of new crowdfunding regulations open to all investors (not just accredited investors). The intended time horizon of this investment at least 5 years, but they also advertise “quarterly liquidity” as a feature (see below). I was interested to see how this feature worked, as many of the other asset-backed loans in which I am invested could take a year or longer to get my money back. I decided to test out this “emergency hatch”.

The rules. You are allowed to make a redemption request once per quarter. For the full details on Fundrise quarterly redemption plans, please see the section of each eREIT Offering Circular titled, “Description of Our Common Shares—Quarterly Redemption Plan” at this link. It’s pretty dense, and I will only highlight this table which includes the “early withdrawal penalty” imposed if you redeem your shares within 5 years.

In other words, if I redeem now after one year, I will pay a 3% penalty on the current net asset value (NAV). The NAV itself is a complex calculation of the underlying assets that I believe is only updated to investors once a quarter.

Note that you are not guaranteed to have liquidity of all your shares. If too many shareholders request liquidity at the same time, that might force them to sell assets at large discounts and harm other shareholders. Here is an excerpt from the Offering Circular:

Q: Will there be any limits on my ability to redeem my shares?

A: Yes. While we designed our redemption plan to allow shareholders to request redemptions on a quarterly basis, we need to impose limitations on the total amount of net redemptions per calendar quarter in order to maintain sufficient sources of liquidity to satisfy redemption requests without impacting our ability to invest in commercial real estate assets and maximize investor returns.
In the event our Manager determines, in its sole discretion, that we do not have sufficient funds available to redeem all of the common shares for which redemption requests have been submitted in any given month or calendar quarter, as applicable, such pending requests will be honored on a pro rata basis. […]

Redemption Process. The process of requesting a quarterly redemption was straightforward. Here’s a step-by-step rundown:

• Contact Fundrise support and request a redemption (3/6 in my case). You need to make this request at least 15 days prior to the end of the applicable quarter.
• They asked the reason for my redemption, and I told them. You don’t need to supply a reason, they just wanted feedback.
• They sent over the official redemption form, which I was able to read and complete online. I received an e-mail confirmation of my redemption request.
• At the end of the quarter (3/31 in my case), I received another e-mail confirmation that my redemption request was processed.
• 12 days after the end of the quarter (4/12 in my case), I received another e-mail confirmation that the funds were being transferred to my bank account.

Complete Investment Timeline. Here’s a summary of cashflows from beginning to end.

• December 29, 2015. Invested $2,000 into Fundrise Income eREIT (200 shares x $10 a share).
• Held for 15 months. Received 5 quarterly income distributions on a timely basis in April, July, October 2016 and January, April 2017. Total of $234.79.
• Early March 2017. Requested redemption of all 200 shares as of the end of quarter 3/31/17.
• April 12, 2017. Received $1,908 in principal back. 100% of NAV would have been $1967.

Screenshot:

So I invested $2,000 and after 471 days I collected a total of $2,142.79 for a total gain of 7.14%. The annualized return works out to 5.49%. That’s not amazing but not bad considering that I am bailing out of a 5+ year investment after only a year. I’m confident that my returns would have been better if I waited out the full 5 years as real estate ownership investments take time to work out. (Traditional non-traded REITs are infamous for having huge penalties for early withdrawals where you get back less than 90 cents on the dollar.)

Hopefully this post answers some questions about the liquidity of Fundrise eREITs. I received my money, as requested, in about a month. If instant/daily liquidity is important to you, I would still stick with publicly-traded REITs.

Bottom line. The Fundrise Income eREITs are meant as long-term investments with time horizons of at least 5 years. However, they advertise the availability of limited quarterly liquidity. I tested out this liquidity feature and was able to cash out subject to a 3% discount from net asset value. It worked as promised, howewer I would not recommend using this option unless necessary as it will impair your overall return. Fundrise does warn you that in an extreme event with depressed prices, this liquidity window may be closed for the benefit of long-term investors. You can sign-up and learn about currently-available Fundrise eREITs here.

When I think about it, I am impressed with how different 2017 feels compared to when I started seriously learning about investing in 2003. Instead of only reading about it in few books mostly read by finance nerds, nowadays nearly every robo-advisor out there uses a globally-diversified mix of low-cost ETFs to build their portfolios. What used to be a relatively quiet alternative to buying 4-star active funds is now becoming the default choice.

We’ve seen from the Callan Investment Returns Table that the best-performing asset classes constantly change from year to year. In a industry magazine called Investments & Wealth Monitor, there was an article titled Why Global Asset Allocation Still Makes Sense by Anthony Davidow. (Found via AllAboutAlpha.)

Here’s an illustration of how a globally-diversified portfolio has outperformed. Below is a graphic from the article comparing a 100% S&P 500 portfolio, and 60/40 S&P 500/US Agg Bond portfolio, and a “globally diversified portfolio” using historical data from January 1, 2001 to December 31, 2016. Index values are used directly as opposed to actual ETFs or funds. The portfolio are rebalanced annually back to target asset allocation.

Their “diversified portfolio” had a rather finely-diced list of asset class ingredients:

• 18% S&P 500 (US Large-Cap)
• 10% Russell 2000 (US Small-Cap)
• 3% S&P US REIT
• 12% MSCI EAFE (International Developed)
• 8% MSCI EAFE Small Cap
• 8% MSCI Emerging Markets
• 2% S&P Global Ex US REIT
• 1% Barclays US Treasury
• 1% Barclays Agency
• 6% Barclays Securitized
• 2% Barclays US Credit
• 4% Barclays Global Agg EX USD
• 9% Barclays VLI High Yield
• 6% Barclays EM
• 2% S&P GSCI Precious Metals
• 1% S&P GSCI Energy
• 1% S&P GSCI Industrial Metals
• 1% S&P GSCI Agricultural
• 5% Barclays US Treasury 3–7 Year

I do wish this portfolio was a bit more simple and easy to replicate. However, if you take a step back, you could simplify this asset allocation into the following:

• 56% Global Stocks (50% US/50% Non-US)
• 5% Global REIT (60% US/40% Non-US)
• 34% Global Bonds (70% US/30% Non-US)
• 5% Commodities

Now, we can’t necessarily expect a global portfolio to always outperform. One thing is usually doing better than another thing you own. Most recently, US stocks have outperformed International stocks quite significantly. Here’s an explanation from the article about the “free lunch” of diversification:

Diversification strategies do not guarantee capture of profits or protection against losses in any market environment, but they have been shown over time to provide a smoother ride. Rather than bearing the brunt of the 2000 Tech Wreck and the 2008 Great Recession, the diversified portfolio provided cushioning under the large market drop and was able recoup losses and grow over time.

We’ve all been told that past performance is no guarantee of future returns, but it’s still hard to buy an investment that has been performing poorly. We need to remember the historical power of diversification and that even though something may look horrible now, good news may be just around the corner.

Callan Associates updates a “periodic table” annually with the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one at their website Callan.com, with access to previous versions requiring free registration.

Every calendar year, the best performing asset class is listed at the top, and it sorts downward until you have the worst performing asset. Here is the most recent snapshot of 1997-2016:

The Callan Periodic Table of Investment Returns conveys the strong case for diversification across asset classes (stocks vs. bonds), investment styles (growth vs. value), capitalizations (large vs. small), and equity markets (U.S. vs. non-U.S.). The Table highlights the uncertainty inherent in all capital markets. Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years.

I find it easiest to focus on a specific color (asset class) and then visually noting how its relative performance bounces around. This year, I note that Emerging Markets (Orange) tends to either run really hot or cold. For the past 4 years, Emerging Markets has been near the bottom. MSCI EAFE (Developed Foreign Stocks, Light Grey) have also been doing relatively poorly. I still hold them as they will one day bounce back to the top.

Do you recommend Wealthfront? Betterment? WiseBanyan? Schwab Intelligent Portfolios? Vanguard Personal Advisor Services? The upstarts like to bash on the competition, making it seem like they are your digital savior while everyone else is evil. The truth is that they are more similar than different.

Morgen Beck Rochard of Origin Wealth Advisors recently created the helpful infographic below on the wide range of possibilities you can get when you hire a “financial advisor”. Found via The Big Picture. Click for full source image.

What does it mean? The term “financial advisor” tells you nearly nothing about:

• Their level of training or years of experience.
• The type of investment products that they sell (individual stocks, active funds, passive ETFs, whole life insurance, complicated annuities?)
• How they are compensated (flat fee, percentage of assets, commissions).
• Whether they are a fiduciary (legally required to always act in the client’s best interest)

Wealthfront, Betterment, WiseBanyan, Schwab Intelligent Portfolios, and Fidelity Go are all in the space of “Fee-only Passive Management” near the top. They are all Registered Investment Advisors (RIAs), which amongst other things are fiduciaries legally required to act in your best interest. They all manage a diversified portfolio of low-cost, passively-managed funds. They all charge a fee based on assets managed. They all provide limited financial planning, mostly using software with inputs that you adjust yourself.

Avoid everything below! Stay away from the yellow, orange, and red boxes. Complicated universal life insurance and equity-indexed annuities. Expensive mutual funds with expense ratios of 1% or higher. Using the principle of inversion, by simply avoiding these products you’re already doing above-average (with below-average fees).

Meanwhile, at the very top is what I cynically call “unicorn land”. Who doesn’t want a qualified human advisor that puts your interests first, provides comprehensive financial planning, and charges a reasonable fee? The paradox we get is that if a high-touch human financial advisor is good at what they do, chances are that they won’t look at your account unless you have over $1 million. Also, they tend to be more expensive. Looking at the Form ADV of Origin Wealth Advisors for example, over 75% of clients are “high net worth” and the portfolio management fee is 1.5% annually unless you have more than $5 million. There is nothing wrong with targeting high net worth clients and charging a premium fee for premium service. A human advisor that keeps you on course and prevent market timing or panic selling could create “advisor alpha“. But 1.5% annually is expensive, any way you cut it.

There are qualified, reasonably-priced human advisors out there, but you won’t find them on every street corner. In contrast, anyone with $500 can click on over the Betterment or Wealthfront and get a solid portfolio built and rebalanced regularly for them. At 0.25% annual fee, a $100,000 portfolio will cost $250 a year. Most people don’t even have $100,000 saved up.

If I had to start all over from the beginning, I’d probably do this. First, save up cash until you get $1,000. Then buy and keep investing in a Vanguard Target Retirement mutual fund. At the same time, learn about investing, behavioral psychology, and market history. Read, read, read. Then manage my own portfolio. But that’s not for everyone.

If you can keep putting money into your Target Retirement fund even during market panics with no other authority figure (robo or human) to help you out, then you could just keep your money there indefinitely. Give it a decade or three, and it will work fine. If you want to hire a low-cost robo-advisor to manage your portfolio, that will also work fine (if you also let it be). The more complicated robo-portfolios might create a slightly-higher risk-adjusted return, and automated tax-loss harvesting could offset part or all of the advisory fee. Remember that you are picking between different shades of blue on the above spectrum. You’re doing pretty good. Don’t become a victim of paralysis by analysis. The enemy of a good plan is a perfect plan.

Here’s a Vanguard Blog post called Mind fund details, not labels by Frank Kinniry that includes some good reminders about the mutual fund and ETF industry:

• Low-cost vs. high-cost is more important than actively managed vs. passively managed.
• Index funds can have high expense ratios.
• Actively-managed funds can have low expense ratios.
• You should also evaluate based on “managerial talent”, although that is much harder to judge than costs.
• Therefore… look under the hood at the asset allocation and expense ratio!

Did you know that the average Vanguard active fund is actually cheaper than the average non-Vanguard index fund or ETF?

A consistent history of low costs and solid, conservative management is why I have overall positive opinions of the Vanguard Wellington and Vanguard Wellesley mutual funds. If you accumulate enough assets to qualify for Admiral Shares, they only cost 0.18% and 0.15% respectively. I wouldn’t necessarily recommend them to my family as my #1 choice, but I wouldn’t tell them to switch out either. I would certainly pick Wellington/Wellesley in a 401(k) plan over a similar allocation towards expensive index funds or an expensive target retirement fund.

Bottom line. There are a lot of expensive index funds out there. Watch out.