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REITs, Target Dates, Dollar-Proofing, and More

A roundup of investment news.

Morningstar Analysts, 12/08/2009

REITs Look Good over the Long Term
REITs struggled mightily in 2007 and 2008, returning negative 15.7% and negative 37.7%, respectively, after racking up double-digit percentage returns in seven out of the eight years between 2000 and 2006 (equating to a compound annual return of 22.3%). REITs have bounced back in 2009 thus far, producing an annualized return of 23.3% through September.

Morningstar research and communications manager Jim Licato analyzed a longer (1972-2008) time period, and he found that REITs have generated an attractive compound annual return of 11.2%, placing them between large stocks (9.5%) and small stocks (12.5%).

Breaking down the total return, the income generated from REITs has been relatively stable and consistent, while the price return has fluctuated widely from year to year. With clients who are hesitant to invest in REITs because of the most recent real estate crisis, it may be helpful to show them what they would have experienced if they held REITs over long time periods. Consequently, the volatility of this alternative asset class should become much more palatable for them.

The chart below illustrates the realized losses in REITs for one-, five-, and 15-year periods.

(View the related graphic here.)

Of the 37 one-year periods from 1972 to 2008, eight periods resulted in a loss (22% of the years examined). When increasing the holding period to five years, however, none of the 33 overlapping five-year periods ended with a loss. Similarly, not one of the 23 overlapping 15-year periods produced a negative return.

These results go back to the income potential of REITs, which are required to distribute at least 90% of their taxable income to shareholders on an annual basis. During a year in which REITs may be struggling from a price-appreciation perspective, it always has the income component to fall back on. On the flip side, when REITs are prospering from a price-return perspective, the income return further enhances the asset class' total return.

The real estate bubble and burst may have your clients a bit hesitant when it comes to investing in an asset class like REITs. Clients must realize that they can expect to experience losses from time to time when investing in REITs.

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