REITs present many benefits

by PATRICIA HolmesUncategorized

Real Estate Investment Trusts (REITs) present many benefits for investors. REITs provide opportunities for strong dividends, portfolio diversification, protection from inflation and robust performance.

Commercial real estate sector

Data provided by the 2012 Research Magazine Guide to REIT Investing indicated that while economic growth in the United States slowed during the first six months of the year, one sector that managed to show encouraging signs was commercial real estate.

Performance

Many subsectors of commercial real estate fared well during the first six months of 2012, including apartments, warehouse, retail and office space. While vacancy improved gradually, the rents paid by these properties grew.

While the S&P 500 Index surged 9.49 percent during the first half of the year, the FTSE NAREIT All Equity REITs Index, which represents 128 firms in the industry worth more than $500 billion, spiked 14.91 percent.

Diversification 

During a time of high asset correlations, securities that provide diversification can certainly prove valuable. Between the years of 1991 and 2011, REITs had a 56 percent correlation with large-cap stocks. This compares to an 80 percent correlation between small-cap equities and large-caps during the period. During periods of substantial volatility, REITs can be helpful as they do not move closely with other equities.

Dividends

Equity REITs provide a strong stream of dividend income, due to their corporate structure and their continued collection of rents. These trusts generate the income by gathering rental income from tenants, and the fact that they are incorporated as pass-through entities means that they need to distribute at least 90 percent of taxable income to shareholders every year.

This requirement means that a larger share of their returns is attributed to dividends. The dividend payments made by REITs have generally been substantially higher than those paid by companies contained in the S&P 500 Index.

Protecting against inflation

Investors can utilize REITs to protect themselves from the costs of inflation. These trusts enjoy rents and property values that generally rise along with the price level, which helps the dividends paid by the trusts to increase over time. These gains help to provide investors with income even during periods of high inflation. 

Current asset market trends encourage long-term financial planning

by PATRICIA HolmesPersonal Finance

The trends that the asset markets are displaying currently should motivate young investors to engage in long-term financial planning strategies.

Corporate data indicates that the individual correlation of stocks have been rising over the last few months. In addition, robust demand for high-quality debt-based instruments that are considered “safe” has pushed yields in many bonds to ultra-low levels.

The higher correlations make it more difficult for investors to beat the market by picking out equities that outperform the broader market for stocks. The environment of low yields can interfere with market participants who want to generate acceptable returns by using bonds.

One way that these individuals can overcome the myriad challenges presented by both the stock and bond markets is to engage in long-term financial planning. This strategy can be particularly helpful to young investors who don’t necessarily need their funds back any time soon.

Equity market returns

While the equity markets have displayed high correlations and substantial volatility in the recent past, the stock market as a whole has provided average annual returns that are traditionally estimated as being 10 percent. Data recently provided by independent financial advisor Index Fund Advisors states that the stock market has averaged an annual return of 9.6 percent since 1928, according to USA Today.

It is important for young investors to remember that the figure of 10 percent does not mean that putting $1,000 into the stock market in January of 2013 will result in having $1,100 in January 2014. The annual figure of 10 percent is one that has been averaged over many years. The returns granted by the equity markets in any given year can vary substantially. It is also important to note that the average annual returns of 10 percent are not adjusted for inflation. Inflation is difficult to measure since its various components rise unevenly.

Indexing

In addition to inflation, fees associated with the purchase of financial instruments can eat into the returns generated by investors. One way to keep these transaction costs down is to participate in the strategy of indexing, which involves purchasing securities that passively track the markets.

Effective planning

Young investors can quickly gain exposure to the equity markets by placing their funds into financial instruments such as index funds or exchange traded funds (ETFs). By engaging in long-term financial planning and constructing a diversified portfolio of ETFs and or index funds, a person can put a solid strategy in place and begin to accumulate wealth.