Should REIT Investors Only Use A Buy And Hold Strategy?
Using REITs as an example I respect Brad’s expertise and experience in identifying the better choices of long-term, income-growth REITs. I have no such credentials. So I took his choices as listed in his report, and only included those where my special information could contribute. What I bring to the party is the daily updated next few months’ price range forecasts of market-makers [MMs] for over 2,500 widely-held and actively-traded equities, including hundreds of REITs. Their forecasts are derived from their hedging actions (real money bets) taken to protect firm capital required to balance buyers with sellers in filling volume block trade orders of billion-$ fund management clients who are adjusting portfolio holdings. Those forecasts are forward-looking additions to the reward/risk challenge, providing explicit downside price exposure prospects, as well as comparable upside gain potentials. Conventional risk/reward evaluations usually are based on only one forward-looking dimension: EPS and its growth potential. Everything else is drawn from history. Past P/E ratios and past price behaviors. Worse yet, the downside guess is typically a symmetrical measure (standard deviation) of price change, including upside differences from a mean value as well as downside ones. And the longer-term historical periods measured assume that neither the size of the variances nor their upside to downside balance varies over the time period. The assumption is that “risk” is static. Do today’s market prospects look like they did six months ago? Or a year ago? We also use history as a guide. But we try to make more sensible comparisons, because we have the information at hand to do so. We can look to the history we have collected live as the market has evolved daily in the past 15+ years since Y2K. We know what was being estimated by those arguably best-informed pros in the market, in terms of their stock-by-stock, day-by-day real money self-protecting actions. Real behavioral analysis of folks doing the most probable “right” things, not everyday man making errors of perception. We look to see how prices actually changed following prior forecasts that had upside-to-downside balances like those being seen today. And recognizing that today’s competitive scene continues to evolve, we limit our look back to the most recent five years, 1,261 market days. How that looks for this sample of REITs Click to enlarge This table has columns of holding periods following the date each forecast was made, increasing cumulatively up to 16 weeks of five market days. It has rows showing the annual rates of change (CAGRs) in each of the holding periods, for the forecasts counted in the #BUYS column. Those forecasts are a total in the blue 1: 1 row, so they are the average of the several REITs. The row above the blue row includes about half of the total sample, counting all forecasts where the upside prospect was twice the downside, or better. The next higher row includes only those forecasts where the upside was three times the downside. That process continues to the top row where only the forecasts that had huge positive upside balances, or had no downside at all, existed. The bottom half of the table below the blue row is just the inverse of the top half. In some ways, it is the more interesting part of the table. It shows that for these REITs the MMs pretty well identified the points in time where price problems were upcoming. It also shows that those issues would eventually recover, and at a later date probably be part of the forecasts shown in the upper half of the table. It also justifies the notion that if time is not a problem for the investor (he/she has adequate financial resources to deal with current retirement needs or sufficient time remaining before retirement to get there), then buy and hold works for them as a strategy in these cases. But if time is closing (or has closed) in on the retiree, then an active investment strategy of moving away from troubled REITs and into more favorably positioned ones can provide capital gains, along with the payout income of the alternative. It takes work and attention that is not required with B&H. But the CAGRs that can be added are not trivial. The REIT illustration has broader application Brad makes a strong case that, focused as he is on REITs, they should make up only a minor part of the investor’s portfolio. The table he uses from asset manager 7Twelve, showing year-by-year returns for various asset groups is instructive. Here is a copy of that table: Click to enlarge It has to be enlarged to be readable, but it is worth the effort. The yellow-highlighted years of best asset performance HOLLER * for attention to active asset-class portfolio management if you expect to beat the “market” average. The simple arithmetic average of the best asset gains each year was +31% and the worst averaged -14%. What typically is taken as the “market” average year was +5% simple, but the CAGR for the S&P 500 over the 15 years is about zero. *(A little Maine human: I had an Uncle who sometimes referred to advertising “written in letters large enough that you had to holler to read ’em”). Robyn Conti’s survey of investors in retirement showed that only 55% of them had over $200,000 portfolios. Of that 55, 31% had over $1 million. Some 5% admitted to less than $200,000 and the other 40% may have none. Trying to live better than social security and what a 401(k) plan may provide is pretty tough from even an 11% yield on $200,000 if it all was in REITs at the above table’s average. But as Brad makes clear to all nest featherers, we should use several baskets. Trouble is, the varied asset classes all present active-management alternatives if you have the insights. Here is how the Dow Jones stocks have fared over the past five years, based on MM forecasts: Click to enlarge Clearly, over the last five years, there have been hundreds of instances in these 30 stocks where substantial lasting capital gain advantages could be had, and as many or more where major capital calamities could be avoided. And these are the most closely watched stocks. Bigger and more frequent increments are being offered regularly elsewhere. Conclusion For many retirees, (the 31% in Robyn Conti’s survey with over $1 million portfolios and some of the 24% slightly less well-heeled), where REIT investments are concerned, buy and hold is a well-earned and satisfying strategy. But both her report and Brad Thomas’ advice open the consideration of earning more comforting resource reserves by the investor taking an active part in building and maintaining a more rapidly growing portfolio. We are particularly sensitive to the problems of those within 15 years of retirement who, by buy and holding SPY or similar market-average investment, may have lost any opportunity for growth over the last 15 years. They probably can’t afford to repeat that experience without a love for a future greeter role at the local Wal-Mart.