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The Role of REITs for Long-Term Investors

by Brad Case

The Role Of REITs For Long Term Investors Splash image

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.

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.

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Brad Case Ph.D., CAIA, is senior vice president of research and industry information for NAREIT, the National Association of Real Estate Investment Trusts (www.reit.com).


Discussion

Dave from Washington posted over 2 years ago:

Please make the Figures clear so we can actually see the comparisons. Thanks.


Charles from Illinois posted over 2 years ago:

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


George from Virginia posted over 2 years ago:

The charts were hardly legible ever after I had clicked twick on them.


Charles from Illinois posted over 2 years ago:

George, did you increase them to full screen view so they appear separate from the article? -Charles Rotblut


Leslie from Maryland posted over 2 years ago:

I did both enlarging efforts and they were still blurry and I could not read them.


Roger from Washington posted over 2 years ago:

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?


Curtis from Iowa posted over 2 years ago:

they were clear on my laptop


Jon from New York posted over 2 years ago:

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...


Mary from Maryland posted over 2 years ago:

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?


Charles from Illinois posted over 2 years ago:

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


Brian from Georgia posted over 2 years ago:

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.


John p from Georgia posted over 2 years ago:

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.


C from Rhode Island posted over 2 years ago:

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.


Ron from Florida posted over 2 years ago:

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.


James from Wisconsin posted over 2 years ago:

In their "Model Portfolio for Retirees - Balanced Portfolio", Morningstar recommends 2.5% in Real Estate (REITS)


John from California posted over 2 years ago:

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?


Charles from Illinois posted over 2 years ago:

John, my understanding is that REITs are qualified to be held in an IRA. They typically do not generate UBTI. -Charles Rotblut, AAII


Doug from California posted over 2 years ago:

I have held REITs in an IRA for years, keeping between 10-15% of my total equity allocation. The results have been quite satisfying.


Leonard from Nevada posted over 2 years ago:

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.


Winthrop from Illinois posted over 2 years ago:

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?


Benjamin from Vermont posted over 2 years ago:

Where can i find current net asset values for reits?


Jean from Illinois posted over 2 years ago:

REIT data can be found at www.forbes.com/reits -Jean, AAII


Lee from North Carolina posted about 1 year ago:

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


Peter from Illinois posted 10 months ago:

I remember the Rothschild maxim, to keep 1/3 of assets in real estate, 1/3 in equities and 1/3 in fine arts. I've applied the first part (1/3 in real estate) to my IRA and annuity accounts using RIET mutual funds, and the results have been excellent. very good article that quantifies the rationale for diversification with RIETs.


John Fagan from Connecticut posted 5 months ago:

I use the Vanguard REIT Index keeping it at 5% of my equity portfolio. I re-balance annually in January and have been finding that I am often selling some of my REIT shares and investing in parts of my equity portfolio that have not done as well. I have found that using this index is a lot easier than selecting individual REIT securities.


Peter Rukavena from New York posted 5 months ago:

It is true that the correlation of the overall market with REITS does widen over long periods of time , there is one exception:

Unfortunately during periods of significant decline in the overall markets , REITS start to become highly correlated.

Just look at the levels of correlation with almost every investment during the 2008 meltdown.

Overall , maybe with the exception of some bond investments it pushed 90% plus correlation.

That being said I like REITS as a core asset holding, I currently have a significant position in a number of REITS.


Eric Slater from California posted 5 months ago:

I have had about a 15% allocation to REITS in my equity portion of my IRA for years, and also rebalance annually. I am very satisified with including them, but wonder why the reported P/E ratios for domestic REIT funds are so high compared to foreign REIT funds. I suspect this is due to the accounting of profits, and the fact that 90% must be returned to the stockholders to avoid corporate taxes, but would like to have an explanation from someone in the REIT industry that clarifies this.


Richard Sar from Colorado posted 5 months ago:

My wife inherited a fraction of a REIT a few years ago and my son-in-law is executor for one his dad owned. Getting rid of them as part of an estate is difficult. Think as a mutual fund it would be easier to get rid of.


C Nelson from California posted 5 months ago:

REITs can be good and liquid. Nine years ago a friend (former mortgage banker and developer) suggested I look at a locally based triple-net-lease REIT because he liked their business model (not all REITs are the same!). The group traded on the NYSE "under the radar" at the time. Since it's local I attended their annual meetings - an astute CEO with a sense of humor, clear strategy and outstandingly transparent financial reports. The stock price doubled over the nine years all while paying an increasing monthly dividend (bought more when it dipped in 2008). Beginning this year they completed acquisition of another REIT and increased the dividend significantly. But recently the CEO retired and institutions now own a much larger percentage; such changes raise my nervousness level, so watching closely while holding (in my IRAs). The stock, Realty Income, trades under the symbol "O".


William Curtis from Kentucky posted 5 months ago:

REITS are cyclical, I have owned Vanguard's VGSLX since early 2009 and it did very well. I dropped them about mid-year due to the threat of Fed taper. As bond rates go up, REIT dividends become less appealing on a risk-adjusted basis. They have been under-performing the S&P since about mid 25013. I will buy again when they start to rise.


Sanford Levey from Massachusetts posted 4 months ago:

I don't currently own any reits but would like to purchase some. I would appreciate any guidance re: the Timing to buy in. Thanks.


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