The Role of REITs for Long-Term Investors
by Brad Case
The German statesman Konrad Adenauer was quoted as saying “We all live under the same sky, but we don’t all have the same horizon.”
That’s certainly true of investors: We all live among the same set of assets, but how we combine them into an investment portfolio depends on our own circumstances—including our investment horizons.
In this article
- Stock Correlations Move Closer Over Time
- REIT Correlations Widen Relative to Stocks
- Implications for Portfolio Management
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To simplify, we might say there are two types of investors. The first type—call them tactical—pays attention to short-term fluctuations, hoping to identify opportunities to buy undervalued assets or to sell overvalued ones. Tactical investors play an active role in identifying mispricings and trading in a way that tends to eliminate them. For tactical investors, correlations among asset classes are less important than current valuations—and volatility may actually be good, because it creates trading opportunities.
The second type of investor—call them strategic—doesn’t have time to look for short-term mispricings; instead, they structure a well-diversified portfolio and take advantage of the interactions among their assets—that is, the power of diversification—to reduce the likelihood of a hit that would affect the entire portfolio. Strategic investors have a long investment horizon: Current valuations are less important than low long-term correlations and strong long-term risk-adjusted returns.
It’s not surprising that the investment characteristics of particular assets change over time: For example, return volatility for publicly traded real estate investment trusts (REITs), along with most or all other assets, spiked during the credit crisis of October 2008–March 2009. (REIT volatility rapidly declined to normal levels after the crisis ended, however.) What is more surprising, though, is that investment characteristics may also change over different investment horizons. If that’s the case, then you can potentially make better portfolio decisions by understanding investment characteristics at your own most relevant horizon.
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Discussion
Please make the Figures clear so we can actually see the comparisons. Thanks.
posted about 1 year ago by Dave from Washington
Dave - If you click on the images twice, they will enlarge to a full screen view. This will allow you see the figures in better detail. -Charles Rotblut
posted about 1 year ago by Charles from Illinois
The charts were hardly legible ever after I had clicked twick on them.
posted about 1 year ago by George from Virginia
George, did you increase them to full screen view so they appear separate from the article? -Charles Rotblut
posted about 1 year ago by Charles from Illinois
I did both enlarging efforts and they were still blurry and I could not read them.
posted about 1 year ago by Leslie from Maryland
I just read in Money magazine that
9 times at much money flowed into REITS in 2010 vs. 2009. Also, the price of REIT equity stocks have soared 192% since March 2009. If this is true, why would anyone want to invest in REITS right now?
posted about 1 year ago by Roger from Washington
Very interesting article; next, it would be useful to have someone build upon it by suggesting appropriate portfolio allocation percentages for REITs throughout the investor's life cycle; for example, should they replace stocks, bonds or a percentage of each, and, if stocks, what capitalization, what region...
posted about 1 year ago by Jon from New York
Figures very blurred whether enlarged or full screen.
Also, I'm new and could use some help. Where do I even get the names of some REITS to evaluate, and would I use the stocks screens to evaluate?
posted about 1 year ago by Mary from Maryland
Mary, if the figures are not appearing correctly on your screen, try printing the .pdf and see if that helps. The physical magazine should be arriving in mailboxes soon as well. As far as identifying REITs, NARIET has a list on its website: http://www.reit.com/IndividualInvestors/REITsinSPIndexes.aspx -Charles Rotblut, AAII
posted about 1 year ago by Charles from Illinois
If you right click on the figures and then "open in new window" or "open in new tab" they are very legible. Double clicking does not appear to do the trick anymore.
posted about 1 year ago by Brian from Georgia
All you have to do RIGHT click on the image and choose "Open in a New Tab." The image will then be large, clear and in separate window.
posted about 1 year ago by John p from Georgia
Correlations are an academic exercise that data miners and people looking to influence others use to ... influence others. What would have this 'correlation view' done to help investors avoid REITS in 1975 when they got creamed .... or in 1990 .... or in 2008 ?
I'm sure NAREIT would love AAII member to pile into REITS that would feed through to more commisions for realtors but it this really in the best interests of AAII investors ? Doubtful. Caveat emptor. Real estate can be a great investment but it is also very illiquid and VERY CYCLICAL. This article says nothing about those cyclical risks at present.
Brad Case says : "Current valuations are less important than low long-term correlations and strong long-term risk-adjusted returns."
This is baloney; current valuations DRIVE risk-adjusted returns so Brad is selling snake oil with this statement.
posted about 1 year ago by C from Rhode Island
I often have about 5% on Reits and have never been burned. As my 4.5% corporate bonds mature I use Reits and utilities as pseudo bonds.
posted about 1 year ago by Ron from Florida
In their "Model Portfolio for Retirees - Balanced Portfolio", Morningstar recommends 2.5% in Real Estate (REITS)
posted about 1 year ago by James from Wisconsin
Are REIT's qualified investments for an IRA? Or are they, like Master Limited Partnerships considered to be off limits due to unrelated business income?
posted about 1 year ago by John from California
John, my understanding is that REITs are qualified to be held in an IRA. They typically do not generate UBTI. -Charles Rotblut, AAII
posted about 1 year ago by Charles from Illinois
I have held REITs in an IRA for years, keeping between 10-15% of my total equity allocation. The results have been quite satisfying.
posted about 1 year ago by Doug from California
I am an ex-stockbroker of 30+yrs. My objective is to accumulate a good portion of my portfolio in REIT's that are extremely oversold and keep a close stop loss as they rise in value over the next 2 yrs or so. We are in an excellent interest rate environment and the fed will keep rates low for the next 2 yrs. Every stock or REIT has a cycle and if you buy into the extreme dips, you should generally be in good shape. Collect the divs and add more to the portfolio as each opportunity arises. Same is true for MLP's.
posted about 1 year ago by Leonard from Nevada
Leonard from Nevada
You wrote "My objective is to accumulate a good portion of my portfolio in REIT's that are extremely oversold and keep a close stop loss as they rise in value over the next 2 yrs or so."
My question is:- Why do you what to keep a close stop loss....if you expect they would rise in value over the next 2 yrs or so?
posted about 1 year ago by Winthrop from Illinois
Where can i find current net asset values for reits?
posted about 1 year ago by Benjamin from Vermont
REIT data can be found at www.forbes.com/reits -Jean, AAII
posted about 1 year ago by Jean from Illinois
Mary asked for some names of REITs but no one seemed to respond. Here are some of the lower priced ones that I hold and their current dividend rate.
TWO [Two Harbors]div. rate 15.79%
MFA [MFA Financial] 12.66%
DX [Dynex Capital] 12.17%
CIM [Chimera Invest.] 16.00%
See also RSO, MSW, ANH, NYMT, ARR, AGNC
posted 9 months ago by Lee from North Carolina
