21 January, 2018 Education

Is it time to give up on real estate

Is the poor performance of real estate a good reason to sell?

Real estate has not been a great investment for the past 4 ½ years gaining a cumulative +14% while the S&P 500 has surged +84% during the same time (see accompanying graph). Is this support for abandoning real estate in your portfolio? I don’t think so!

Source: ETF symbol RWR; S&P Compustat

2017 was a particularly disappointing year for investors in real estate with it gaining just +0.4% for the year while the S&P 500 surged nearly +20%. 2018 has not started any better as real estate, by far, has been the worst performing major asset class with a loss of -5.1% year-to-date while the stock market is higher by an equal amount. As frustrating as all of this can be for investors, know that this is very normal and actually the exact performance behavior you want in a diversified portfolio.

What is “Real Estate”?

Real estate, when referenced as part of a liquid investment portfolio, generally is in reference to publically traded companies (stocks) called Real Estate Investment Trusts or REITs. These companies own various types of real estate including:

  • office buildings
  • shopping malls
  • warehouses
  • apartment buildings

There are funds, both mutual funds and ETFs, that invest only in REITs. These funds provide investors with an easy way to own a diversified portfolio of real estate.

Let’s first start with the big picture. There is data on the performance of real estate going back 45 years to the start of 1972. As the accompany graph shows, during this 45 years real estate has performed better than the S&P 500 with a compounded annual return of +11.1% as compared to the S&P 500’s +10.6%. This is particularly impressive given the poor performance of real estate the past 4 ½ years.

Source: National Associated of Real Estate Investment Trusts and ETF symbol RWR; S&P Compustat

The long-term returns of real estate are one, very good, reason for investors to have a portion of their portfolio invested in it. A second reason, and in my opinion, equally or even more important than just the long-term return, is that real estate provides great diversification in a portfolio. The performance behavior of real estate, the timing of its ups and down and longer term cycles, are clearly not the same as the overall stock market. It’s this difference in performance behavior, all things not always going up and down together at the same time, that produces better and less volatile portfolio returns.

Cycles, like the last 4 ½ years, can be tough for investors to accept but it certainly is not always like this. Consider the accompany table and various cycles we’ve seen over the past 45 years between real estate and the S&P 500. There have been multiple, extended periods of time when real estate has performed exceedingly better than the S&P 500.

Source: National Association of REITSS; S& Compustat

As disappointing as an investor may be with the performance of real estate the past 4 ½ years, it’s just the way that it goes. Not all investments go up at the same time and by the same amount…you don’t want them to! This recent performance of real estate, based upon 45 years or historical performance, is entirely normal and no reason to eliminate it from a portfolio. Stay the course!

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