Real Estate as a Surrogate for Bonds: A Dynamic Asset Allocation View

Abstract

Executive Summary. Twenty-five years of experience with high bond yields, combined with appreciation resulting from gradually declining interest rates, has produced an investor mind-set that bonds should occupy a major portion of a mixed-asset portfolio. However, that historical experience is not the norm. The long-term average bond return since 1926 is only 5.7%. With current Treasury bonds yielding only 4% to 5%, perhaps the allocation to bonds should be reconsidered. Instead of bonds, private market real estate is found to comparably fill the need for high and stable income yields, combined with a long-term return that is potentially superior to bonds. The study reveals that the typical stock / bond—with a little real estate—portfolio should probably be balanced between substantial portions of stocks and real estate, with only a very small allocation to bonds in only very risk averse portfolios.