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Subject: REITs In Your Portfolio Tuesday, June 19, 2001
Location, Location, Location: REITS in Your Portfolio
Yes, they’re dull and implacably earthbound. But they can be
good for your portfolio, reducing risk and raising return.
Indeed, real estate investment trusts, otherwise known as REITs,
were the lost stepchildren of investing during the Internet era. When I
last wrote about them (The REIT Bear Market May Be an Income
Opportunity, November 14, 1999) they were providing sweet yields and
selling below book value. (http://www.scottburns.com/991114SU.htm)
Since then, the Internet era has crashed and burned while REITs
have taken off. According to Morningstar, the average REIT has provided
a return of 23.10 percent in the last twelve months. During the same
period the NASDAQ 100 index lost 50.6 percent of its value.
Things change.
And that’s why Ibbotson Associates, the Chicago firm devoted to
spreading the gospel of modern portfolio theory, recently blessed REITs.
In a new study the firm found that equity REITs (the ones that actually
own property rather than trading in mortgages, doing land lease-backs,
etc.) not only produced healthy long-term returns but would also reduce
the risk in a stock and bond portfolio. Better still, the study found
that REIT returns were becoming less correlated with the returns of
other assets.
What does that mean in English?
Just this: add a bit of REIT to your portfolio and you’ll
increase your return, reduce your risk, sleep better, and have more
money when you need it.
Measuring portfolio performance from 1972 through 2000, Ibbotson
Associates found that a portfolio of 50 percent large company stocks, 40
percent 20-year government bonds, and 10 percent Treasury bills would
have had an annualized return of 11.8 percent and a risk of 11.2
percent. (The risk is measured by the standard deviation in the market
value of the portfolio, the higher the figure the greater the risk.)
Take 5 percent from both stocks and bonds in the same portfolio;
substituting a 10 percent commitment to REITs, and the annualized return
rises to 12.0 percent while the risk declines to 10.9 percent. Take 10
percent from both stocks and bonds; substituting a 20 percent commitment
to REITs and the annualized return rises to 12.2 percent while the risk
declines further to 10.8 percent. Simple addition of REIT shares provides what we all
want: more return, less risk. Does this mean REITs are the perfect investment? Not quite. Here’s the pro and con short list: Pro: ·
Because
they are required to pay out the bulk of their earnings, REITs generally
offer high dividend yields. At the end of April, the average REIT
offered a yield of 7.8 percent. Of the 233 stocks in the Morningstar
database with yields over 7 percent, 120 were REITs. If you want current
income that offers potential growth, REITs are it. ·
REIT
prices don’t move in concert with the prices of stocks or bonds. More
important, they became less connected in the last ten years. This means
REIT holdings may act to counterbalance and smooth out returns from
other assets. Cons: ·
While
you may not own real estate in your current portfolio, that doesn’t
mean you aren’t a real estate investor. Most Americans have more of
their net worth tied up in simple home equity than in the stock or bond
market. Adding REIT holdings could give you an unhealthy reliance on
real estate. ·
Adding
REITs to your portfolio will reduce risk for the portfolio as a whole.
That doesn’t mean your shareholdings in REITs won’t stop your heart
from time to time. The sector, like others, has had some very tough
years. Want to learn more? ·
You
can get a listing of publicly traded REITs by visiting the National
Association of Real Estate Investment Trusts at http://www.nareit.com/ ·
Check
the regularly updated Morningstar listings at: http://news.morningstar.com/List_Pages/Industry_Top/0,1568,Y-105-ThreeMth,00.html.
·
Do
a fine tuned search on the Microsoft Investor website which subdivides
REITs into 7 different types on its Stock Screener, http://moneycentral.msn.com/investor/finder/customstocks.asp.
Dallas Morning News file date: 06/19/01---TUE Universal Press Syndicate file date: same Ó Dallas Morning News, Universal Press Syndicate, 2001
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