How often have you read in a financial magazine or newspaper, "Is now the time to get into (or out of) REITs?" It seems that we are always being hit with that inane question. Why is it asked so often? I believe the reason is the existence of yet another myth that is often encountered with respect to REITs: That they are meant for investors to get into and out of from time to time, perhaps "cyclical" stocks that must be market-timed if one is to make any money in them.
This mind-set is, I believe, one of the most dangerous myths of all. It makes several assumptions, all of which are erroneous. These include: (a) REIT stocks must be bought and sold at the right time if one is to do well with them; (b) real estate and REIT stock prices, market conditions, interest rates, and capital markets can be successfully anticipated and timed by astute investors; and (c) that the reason for buying and selling REIT stocks is to score big wins and to avoid equally large losses. Wrong, wrong, wrong!
First, REIT stocks needn't be bought and sold frequently; indeed, they are the ultimate "buy and hold" investment. Their total return performance, averaged over many years, has been outstanding, and certainly competitive with the broader equities markets. More than 50 percent of their returns to investors come from the dividend yields, so investors get paid to wait for the additional reward of stock price appreciation that comes, over time, with earnings, dividend, and net asset value growth.
Second, the most wealth has been created by investors who buy and hold the stocks of excellent companies, for example, Warren Buffett. There is little evidence that traders or market-timers have been able to consistently make money in the stock market. And this is certainly true in REIT world. To successfully time the purchase and sale of REIT stocks, one must be able to forecast accurately the direction of interest rates (both long-term and short-term), real estate markets throughout the U.S., capital flows of both institutions and individuals, rates of inflation and unemployment, and all the other factors that determine real estate and stock prices. This cannot be done consistently and, for 99.9 percent of all investors, isn't worth the effort.
Finally, most intelligent investors do not invest in REIT stocks for quick and sizable capital gains, as one might seek to do in steel, airline, or technology stocks. REIT stocks are best owned for consistent dividend payments, modest price appreciation, over time, corresponding to increases in cash flows and asset values, and low correlations with other asset classes. The investors who do best with REIT stocks are those who have the most patience, are willing to ride out the occasional bear market, and are not expecting to hit home runs.
The claim that REIT stocks are best traded but not owned is truly a myth, and a dangerous one. Intelligent financial planners and advisers are telling their clients to decide on an appropriate allocation to REIT stocks within their diversified investment portfolios and to stick with them, perhaps rebalancing from time to time to maintain that allocation. We'll spend a bit more time on this topic later in the book.
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