THE ADVICE I'M HEARING FROM THE PERSONAL FINANCE EXPERTS reminds me of the 1980s hit song “Hip To Be Square” by Huey Lewis & The News. Pinning all my hopes on aggressive growth stocks is too risky, they say, but spreading investments across multiple classes of stocks and bonds is financially prudent. Being conservative is hip.
Playing it safe by not putting all your eggs in one investment basket is hardly a new concept. But the abrupt end to the Internet Gold Rush, the subsequent stock market freefall and the Enron bankruptcy scandal have combined to make an old idea sound new and reassuring. It seems like only yesterday that everyone under the age of 50 was being told by their financial planner to invest their money in aggressive-growth mutual funds.
Such an emphasis on portfolio diversification can only be good news for REITs, which have provided steady, if not spectacular, returns. Consider that from 1981 to 2000, REIT stocks registered a compound annual total return of 12.4% compared with 15.7% for the S&P 500 and 12% for government bonds, according to the National Association of Real Estate Investment Trusts (NAREIT) in Washington, D.C.
Last May, the results of a NAREIT-commissioned study on asset allocation were released. The study found that the correlation of REIT stock returns to the returns of other common stocks declined significantly over a 30-year period, meaning that REITs act as a hedge against the volatility of other securities.
NAREIT is turning up the volume on the idea that 401(k)s and other tax-deferred defined contribution plans represent an untapped marketplace for real estate investing. “Many 401(k) plans offer a variety of stock and bond investment options, yet a real estate option — one of the best portfolio diversifiers — is virtually non-existent in most of today's defined contribution plans,” writes NAREIT Chair William Sanders. His letter to NAREIT members appears in the current issue of “Real Estate Portfolio,” the association's magazine. Studies show that when compared with the returns of traditional pension plans, 401(k) plans are under-performing by as much as 2 percentage points annually, primarily due to the lack of investment diversification, according to Sanders.
Creating awareness about real estate securities and their potential role in self-directed retirement plans ranks near the top of NAREIT's agenda, according to Jay Hyde, communications director for the association.
“Research shows that the average worker in a 401(k) tends to put it all in either incredibly aggressive investments, or in money market funds,” said Hyde during an interview with NREI at NAREIT headquarters in Washington, D.C. “They tend to throw it all in one category. It's either Las Vegas or bury the cash in the backyard. That's no way to invest.”
The one fly in the ointment is that real estate still is perceived by many investors as an unstable asset class subject to large boom and bust cycles, even though the historical returns don't support that conclusion. And it's far easier for investors to understand blue-chip companies like IBM and GE, which report earnings and not Funds From Operations (FFO), a supplemental measure of a REIT's operating performance.
That said, there's no doubt that REITs today enjoy a stature they've never had before. The inclusion of Equity Office Properties Trust in the S&P 500 last October marked a real milestone for the industry. And with stock market volatility expected to continue in the near term, the income-stock characteristics of real estate securities may prevent smart investors from singing the blues.