https://seekingalpha.com/article/4310950-retirement-why-reits-are-good-bond-replacements Retirement: Why REITs Are Good Bond Replacements
Summary
Historically low – and even negative – interest rates are making it harder than ever to retire.
REITs are a viable alternative to retirees and other income investors who desire greater income without having to take significantly more risk.
Our method enables us to earn high and stable income from real asset backed investments.
Comments
The steep bump up in rates was obvious across the spectrum of investments today. Bonds (and many bond funds) fell. Financial stocks rose sharply. Looks like utilities fell back a bit - another area that runs with bonds - and opposite interest rates.
@hank, thank for your explanation on this week's decline on REITs.
According to Xray this fund's asset allocation is listed at 7% cash, 30% US stocks, 1% foreign stocks, 38% bonds and 8% other (most likely convertibles and preferreds). I'm thinking that the referenced stocks are actually reits. As I write, according to M*, it is off its 52 week high by 1.42%.
In checking this fund at MFO it carries a MFO rating of 5 (best), a risk rating of 2 (conserative) and a bear market rating of 1 (best).
For me, this is a nice income generating fund and one that I plan to add to my position over time as I grow the income area of my portfolio.
"Over the second half of the year, as global central banks made a U-turn and moved from tightening monetary policy to setting rates lower, investors have begun positioning for extra innings in the expansion. That means the "reflation" trade is back on: brisker economic activity will bring higher inflation, the theory goes, which makes bonds and other conservative, dividend-producing assets like utilities and real estate less attractive." (Source: MarketWatch)
overweighting-reits-why-dont-more-experts-recommend-it
People are being swayed away from the usual income generator, bonds and taking on a lot more risk for a purpose that doesn't matter inside tax deferred account. REITs are just as volatile as stocks most of the time. How can that be seen as a bond substitute as the article suggests? I see REITs as an equity substitute myself.
Second, I don't understand this statement you made at all "... but buying them for their income distribution inside a tax deferred account doesn't have much meaning." The REIT's I own are all stuffed in a Roth IRA precisely to avoid income taxes on the distributions generated. I can also sell them free of capital gains taxes when prudent. What am I missing? According to M* buying REIT's in tax deferred accounts is the best place for them.
I meant to add this section from Bees' earlier linked capital gains distribution article:
"Consider Asset Location
Ultimately, an investor's best weapon against unwanted taxable income or capital gains distributions is to pay attention to which assets you hold in tax-deferred accounts (such as 401(k)s and IRAs) versus taxable accounts (such as brokerage accounts). Certain types of investments tend to be less tax-efficient because they are more likely to pay out taxable income or gains than others. These include high-turnover actively managed funds, some types of bond funds including high-yield corporate-bond funds, and REIT funds. Such holdings are a better fit inside of a tax-advantaged account such as a 401(k), IRA, HSA, 529, and the like. By contrast, municipal-bond funds as well as many index funds and ETFs can be good choices for taxable accounts."
What I have difficulty understanding sometimes is: within a total portfolio why it’s necessary to differentiate between the income producing assets and the rest? As @bee points out, what you really care about is total return. Now, albeit, income producing assets might possibly help smooth out the ride - making total return less volatile and more predictible on a yearly basis. But that really gets us into the second way of viewing allocation - as a way to reduce risk and volatility. So, while I now devote 25% of my IRA to two income producing funds (RPSIX, DODLX), it’s done strictly out of a desire to lower the downside risk and achieve more stable year-year total returns. That they churn out income isn’t what’s appealing to me. It’s the lower volatility and the fact that bonds often “zig” when equities and other asset classes “zag.”
To each his own. If your method works for you, that’s what’s important.
Since, I am retired and in the distribution phase of investing I like my portfolio to generate ample income to meet my needs. In this way, I do not have to sell assets to meet cash distribution needs.
In addition, I also look at it in this light. I look at each share owned in a mutual fund much in the same way a farmer looks at an acre of land. While the share/acre is in production it generates some form of income or growth in most cases. Start selling shares/acres to raise cash then pretty soon nothing is left to generate the needed production.
By the way ... even in retirement ... I'm growing my number of shares/acres owned thus increasing my production. And, income generation is a part of this production along with growth of capital.
I agree with hank's comment ... "To each his own."
Is it not great that there is no one way to success (or failure) in investing?
Old_Skeet
Different strokes for different folks !
@Old_Skeet: Is it more profitable to do the farming or rent the acreage out ?
Derf
Have a good weekend, Derf
Thanks. That sounds like a perfectly sane and rational system. (I probably could have written that response for you.
A plan, such as you and I both adhere to, serves many purposes. Two of the most important IMHO are: (1) It instills self-discipline & structure upon what might otherwise devolve into a haphazard approach, (2) It provides a clear and easy to interpret picture of how one’s investments are structured and how well different components are performing. The second is useful in deciding how much can be safely withdrawn yearly, as well as when / how to rebalance.
Being a rather disorganized person, I’d be completely lost without a clearly written plan. The allocation model I’ve used for 20 years (with updating for age) must be a pretty good one - because anytime I’ve considered drastically altering it I’ve been drawn back to the existing plan. While many markets, IMHO, have appeared “dicey” to me for years now, I’d hate to have had everything sitting in “safe” money market instruments pulling 1-3% yearly over the past decade.
Regards
OH - The thread is about REITS. I’ve dabbled in the past in a REIT fund as one of the holdings in my “real assets” group (10% weighting). I’d prefer to buy them at depressed prices, as this asset has been through 2 or 3 nasty downtrends over the past 25 years that I’ve closely watched markets. But if you’re young and don’t mind the potential volatility they may be fine. Personally, I’ve vacated my small hold in one and moved on to some more depressed sectors.
My original point was a reaction to the post article statement, To me it would be ridiculous to do a 1 for 1 substitution of bonds for REITs in a diversified portfolio as the author implies. That portfolio would no longer have the same risk tolerance. I see nothing wrong with using REITs in a well balanced portfolio, but if you substitute your bond portion of the portfolio for REITS (as the author states is "safe" to do to get extra yield) you are taking on the same additional risk as substituting bonds for equity funds in my opinion. Both equities and REITs have similar volatility risk. As I mentioned, Just look at what happened to REITs in the great recession. They tanked as much or more that equity.
Second, my statement, "... but buying them for their income distribution inside a tax deferred account doesn't have much meaning." By "meaning" I meant that it doesn't matter how that REIT fund or any type fund generated its total or final return to you, by yield or by growth, doesn't matter. If you sell the REIT mutual fund inside your IRA (or your Roth) you are just selling the total return that fund generated for you. Didn't matter that it yielded 5%. All that did was increase your total return 5%. Sell that REIT fund or sell an equity fund, what is the difference when it converts to cash?
I will say that if you or maybe old skeet is converting that yield distribution to cash to be used as withdrawal income, that seems to me to just be a convenient way to distribute that income for cash use. A nice idea but I don't see the difference of putting distributions back into the fund balance to let it grow and selling bits of the fund itself as needed.
What I'm not trying to say is that high yielding funds like REITs aren't part of a well diversified portfolio. I think they can be. I'm just trying to say, when you convert that fund to cash, it is only total return that mattered.
Good News Becomes Bad News For REITs
FWIW I'm not buying more REIT's at this time but I am on the lookout for bargains. Timing and patience as they say.
As folks in these (REIT) funds know, self-storage is often an important component (normally around 10-20% of holdings). The article you linked notes fierce competition, oversupply and cooling of demand in the self-storage market.
“In addition to our report on the homebuilding sector, we also published Self-Storage REITs: Storage Wars Wage On. Once a perennial top-performer in the REIT sector, developers and new operators have flocked to the sector in recent years, adding new supply at a furious rate, weakening fundamentals. 2019 was shaping up to be a strong year for the sputtering self-storage REIT sector, but 3Q19 earnings were a setback on the road to recovery. Competition remains fierce in an oversupplied market. Symptomatic of the ongoing storage wars, marketing spending jumped nearly 60% from last year for these REITs, pressuring same-store NOI growth to essentially zero.”
Got me to wondering if there’s some linkage (albeit a bit stretched) between this and the boomers now being 70+ and possibly ridding themselves of various RV vehicles? Personally, I rid myself of a boat recently after 40+ years of boat ownership and no longer rent a self storage unit for it. I’d imagine other types of RV owners also used these convenient storage options.
Here’s an article documenting a slowdown in RV sales:
The RV industry is slowing down after 10 years of growth https://www.curbed.com/2019/6/17/18682121/rv-campers-industry-economy-economic-impact-jobs-2018
The oldest post WW II boomers are now nearing 75. That generation (to which I and many here belong) has had profound impacts on virtually every economic sector over most of the last century including: education, auto and home sales, RV sales, stock and bond markets, brokerages, health care, insurance. The list goes on ...
“ the practice of preserving a body with antifreeze shortly after death ...” - Strikes me as not a novel idea. I’ve known guys who routinely do that ahead of time.
My opinion is that PCI will have a better performance than stocks in the next 5 years and if you are a trader you can avoid the big losses too by using weekly MACD as a good indicator. See PCI (chart) and use it to buy PCI when weekly MACD is positive and sell when it's negative
In any case, what was interesting to hear was that many of their clients are small business owners, construction, trades, sales people who work from their homes but need a place to store material.