REITs... buy more?

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REITs... buy more?

Postby InvestorNewb » Thu May 02, 2013 11:48 am

Hello,

I have more contribution space in my tax-deferred account, so I'm thinking about buying more REITs.

If I use the full amount to buy more REITs, it will account for about 20% of my overall portfolio. It's already very high even before the new contribution.

Is 20% too high to allocate to REITs? My understanding is that REITs isn't really a sector, but an asset class of its own. Is this correct?

At the rate things are going, I feel like Vanguard's REIT ETF, VNQ, will soon be priced higher than the Total Stock Market Index, VTI. VTI is currently at $82.16, while VNQ is at $75.14. But VNQ has been "on fire", as I've already gained around 8.5% in ~2.5 months.

Thx.
Last edited by InvestorNewb on Thu May 02, 2013 11:51 am, edited 1 time in total.
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Re: REITs... buy more?

Postby Elbowman » Thu May 02, 2013 11:51 am

Do you have an IPS?
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Re: REITs... buy more?

Postby InvestorNewb » Thu May 02, 2013 11:54 am

Elbowman wrote:Do you have an IPS?


I manage the portfolio myself, so no IPS here.
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Re: REITs... buy more?

Postby leonard » Thu May 02, 2013 12:04 pm

Your IPS would dictate the target percentage you have set for your asset allocation for REITs. If you are under your REIT target - then purchase REITs. If not, don't.

In general - your asset allocation should be "applied" to your investment accounts. IRA/401k "space" generally shouldn't dictate your allocation to REIT's or anything else.
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Re: REITs... buy more?

Postby telemark » Thu May 02, 2013 12:20 pm

If you're going to take the slice-and-dice approach, you need to be disciplined about maintaining your allocations. Yes, REIT is doing well right now. Enjoy the returns you're getting and put any new money into the lagging asset classes.
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Re: REITs... buy more?

Postby hsv_climber » Thu May 02, 2013 12:23 pm

InvestorNewb wrote:
Elbowman wrote:Do you have an IPS?


I manage the portfolio myself, so no IPS here.


What does it mean "manage the portfolio myself"? Tactical Asset Allocation?
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Re: REITs... buy more?

Postby InvestorNewb » Thu May 02, 2013 12:33 pm

hsv_climber wrote:
InvestorNewb wrote:
Elbowman wrote:Do you have an IPS?


I manage the portfolio myself, so no IPS here.


What does it mean "manage the portfolio myself"? Tactical Asset Allocation?


I just meant that I passively manage it myself. i.e. by reinvesting quarterly dividends, making new contributions, and rebalancing (when the time comes). I don't do much.
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Re: REITs... buy more?

Postby phish_indexer » Thu May 02, 2013 12:40 pm

Based on the current holdings you list, I'd probably use those funds to buy some bonds. And you need an IPS because you self-manage the portfolio.
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Re: REITs... buy more?

Postby ruralavalon » Thu May 02, 2013 12:42 pm

InvestorNewb wrote: Is 20% too high to allocate to REITs? . . .

. . . .. But VNQ has been "on fire", as I've already gained around 8.5% in ~2.5 months.

Yes, IMO 20% of portfolio is too high an allocation. Most pattern portfolios (the exception is that of Yale CIO David Swenson) have REIT at 5 - 10%, Wiki article link: Lazy Portfolios .

The REIT index fund has been doing very well recently, 14.38% YTD, but thats usually a bad reason to buy.
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Re: REITs... buy more?

Postby YDNAL » Thu May 02, 2013 12:44 pm

InvestorNewb wrote:I manage the portfolio myself, so no IPS here.

Have you seen this ?
Link: http://www.bogleheads.org/wiki/Investme ... _Statement
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Re: REITs... buy more?

Postby Default User BR » Thu May 02, 2013 12:48 pm

InvestorNewb wrote:
Elbowman wrote:Do you have an IPS?

I manage the portfolio myself, so no IPS here.

They mean this: http://www.bogleheads.org/wiki/IPS


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Re: REITs... buy more?

Postby bayview » Thu May 02, 2013 2:26 pm

And I bumped this http://www.bogleheads.org/forum/viewtopic.php?f=1&t=50886, which is referenced in the wiki linked above.

I actually went to the wiki after you posted earlier that you didn't see the need for an IPS, since you managed your accounts yourself.

The thread that I linked to has some nice discussions of why writing it down is useful.
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Re: REITs... buy more?

Postby Occupier » Thu May 02, 2013 2:30 pm

Yes 20% is too high. First why do you hold REITS which are just less then 2% of the market by market cap? The answer per Fama/French is that they don't correlate with other asset classes. That means they tend to go up when other classes don't do well, and go down when other classes do well. Following up on the last thought if you really overemphasize REITS they become like the tail wagging the dog. I.E. you don't correlate with other portfolios, but go up when others go down, and down when others go up. Now look at the valuations for REITS compared to where they were in the past. Right now REITS sell for about 2.5 times the book value of the real estate they own and they sell for about 60 times earnings. In 1999 REITS sold for just less then their book value and about 15 times earnings. So right now they are at a historic high. I see posts like yours any time an asset class has had a good run. Back in 1999 people were posting they you should not have REITS but should be loading up on tech stocks. The rest is history. Now if you want something to put in that extra tax free space look at Small Value. Dave
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Re: REITs... buy more?

Postby Streptococcus » Thu May 02, 2013 3:09 pm

Occupier wrote:Yes 20% is too high. First why do you hold REITS which are just less then 2% of the market by market cap? The answer per Fama/French is that they don't correlate with other asset classes. That means they tend to go up when other classes don't do well, and go down when other classes do well. Following up on the last thought if you really overemphasize REITS they become like the tail wagging the dog. I.E. you don't correlate with other portfolios, but go up when others go down, and down when others go up. Now look at the valuations for REITS compared to where they were in the past. Right now REITS sell for about 2.5 times the book value of the real estate they own and they sell for about 60 times earnings. In 1999 REITS sold for just less then their book value and about 15 times earnings. So right now they are at a historic high. I see posts like yours any time an asset class has had a good run. Back in 1999 people were posting they you should not have REITS but should be loading up on tech stocks. The rest is history. Now if you want something to put in that extra tax free space look at Small Value. Dave


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Re: REITs... buy more?

Postby abuss368 » Thu May 02, 2013 8:35 pm

There are a couple of items above worth noting: 1) Investment Policy Statement (IPS) and 2) Allocation of REIT in a portfolio.

1) IPS - I use a spreadsheet that details our asset allocation. We set it and stay the course in all markets. As for a formal document, signed, etc. we don't have a need for it. If however this helps an investor stay the course and not market time in a bull or bear market, then by all means create one.

2) We have a 20% portfolio allocation (i.e. 30% of equity) to US REIT. We are on the fence about International REITs. Perhaps one day as we gain a better understanding and the costs decline. In any event, we have been REIT investors for a long, long time in all types of markets (including 2008/2009) and are very pleased with the returns and results in all markets. It has provided excellent diversification. We intend to stay the course and use the dividends to fund retirement.

Here are some points:

* David Swensen, Yale University CIO, and author of the awesome book "Unconventional Success" (i.e. get the book and read it), recommends 20% of a portfolio to REIT. Now there was a Yale Magazine article in March/April 2009 that noted Dr. Swensen revised the allocation to 15% of a portfolio, but 5% either way does not matter. I met Dr. Swensen last year at my University for an awesome lecture! The best part? He recommended the portfolio as was detailed in Unconventional Success, not the revised one. I have posted this to the forum. Dr. Swenson has noted that 5% - 10% of a portfolio is the minimum to allocate.

* Read Ralph Block "Investing in REITs" to gain an awesome understanding of this asset class and the many benefits. He recommends 15% - 20% of a portfolio to "move the needle", as 5% does not really do anything. You will learn that common fundamentals such as P/E is not the metric that is used but rather Funds From Operations (FFO).

* We have many clients, friends, and family members that have retired and lived from the cash flow (i.e. Dividends, Capital Gains, and Return of Capital - yes the taxability is quite easy, but that is another subject).

* REITs are structured different, taxed different, react to the overall market different (except in times of extreme stress - what does not go down? - but during the tech bubble collapse they were positive).

* REITs are only 3% give or take of the Total Stock Market fund. The reason many investors advise a greater allocation is the amount of Real Estate in the real economy, including private real estate, not just the stock markets.

* Check out http://www.reit.com for excellent educational information (yes, it is a REIT website all things considered).

* Sam Zell, the father and "REIT King" has a ton of REIT investments including Equity Residential and Equity Lifestyle. The dividend income to Mr. Zell is being incredible to live from.

* We have used 20% of equity in he past (the 15% of a portfolio) and were satisfied with that allocation too. I really would not go any lower or I would eliminate the allocation.

* I always use Warren Buffett's "sleep test" - that is he often notes if you can sleep at night, and you are not up, or worrying, you have the allocation that is correct for you. If however, you are upset, up at night, you need to change things!

Post any additional questions you may have.
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Re: REITs... buy more?

Postby InvestorNewb » Fri May 03, 2013 5:45 pm

^^ Thanks for these very helpful insights.

In the last 10 years (probably longer) both REITs and the Total Stock Mkt Index have been pretty closely correlated:

Image

Another reason I want to buy more REITs in my tax deferred account is to take advantage of the high dividends yields without having to pay any tax on them for years to come. I actually won't be able to withdraw from my tax deferred account for another 41 years. :shock: Hopefully I will still be alive by then so that I can enjoy the money. Otherwise the government will get a big chunk of it.

But this is another reason why I think it would be silly for me NOT to invest in REITs due to the asset class being at an all time "high" right now. It's a long term investment so the current price shouldn't be all that relevant.

I guess one of my other concerns was whether REITs have ever been "flat" for years at a time, or have they always been somewhat correlated with the S&P500/Total Stock Mkt Index?

I'm trying not to look at REITs as an individual sector like Energy or Metals, but as a class of its own.
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Re: REITs... buy more?

Postby livesoft » Fri May 03, 2013 5:56 pm

InvestorNewb wrote:^^ Thanks for these very helpful insights.

In the last 10 years (probably longer) both REITs and the Total Stock Mkt Index have been pretty closely correlated:
...

I guess one of my other concerns was whether REITs have ever been "flat" for years at a time, or have they always been somewhat correlated with the S&P500/Total Stock Mkt Index?

Your chart shows they are not correlated. The semi-log scale is deceiving. Would you be able to rebalance out-of and in-to REITs as needed?
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Re: REITs... buy more?

Postby lwfitzge » Fri May 03, 2013 6:07 pm

My plan calls to tilt to 15% of equity. I use VNQ as I believe REITs is a different asset class and I seek further diversification beyond market weighting. I don't add REIT because of recency effect of it performing well as an asset class the last 10 years. The correlation coefficient for VNQ vs SP500 index run around 0.5-0.6 during long periods. During the financial crisis (2008) there was a greater correlation (e.g., 0.8) but then again VNQ was not alone, other things went down too.
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Re: REITs... buy more?

Postby Johm221122 » Fri May 03, 2013 6:20 pm

InvestorNewb wrote:Hello,

I have more contribution space in my tax-deferred account, so I'm thinking about buying more REITs.

If I use the full amount to buy more REITs, it will account for about 20% of my overall portfolio. It's already very high even before the new contribution.

Is 20% too high to allocate to REITs? My understanding is that REITs isn't really a sector, but an asset class of its own. Is this correct?

At the rate things are going, I feel like Vanguard's REIT ETF, VNQ, will soon be priced higher than the Total Stock Market Index, VTI. VTI is currently at $82.16, while VNQ is at $75.14. But VNQ has been "on fire", as I've already gained around 8.5% in ~2.5 months.

Thx.

If Reits were doing poorly what would you be considering to do?
Buying what is on "fire" works better if you buy them when there doing lousy
Don't think divedends, think total return
Pick an AA, stay the course (until your investment policy statement tells you to change) is usually better than picking hot asset to invest in
Think buy low sell high (is this time to sell some reits and rebalance)


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Re: REITs... buy more?

Postby DoWahDaddy » Fri May 03, 2013 6:29 pm

20% is definitely higher than the average bear, but unless the other 80% is entirely investment-grade bonds, its not likely to make much of an impact. What will make the most impact is creating an IPS as recommended earlier, and the impact will be more than just financial.
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Re: REITs... buy more?

Postby PGR » Fri May 03, 2013 9:00 pm

abuss368 wrote:1) IPS - I use a spreadsheet that details our asset allocation. We set it and stay the course in all markets. As for a formal document, signed, etc. we don't have a need for it.


+1 - I'll take my spreadsheet over an IPS.

FWIW I run 17% real-estate but it's in TIAA real-estate account, not a REIT. (yes it's rather expensive)
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Re: REITs... buy more?

Postby nedsaid » Fri May 03, 2013 9:19 pm

Man, this is a timely topic. Just checked my retirement portfolio on Morningstar and REITs are about 14% of my stocks or just under 10% of my portfolio.

I don't think there is any magical number for REITs in a portfolio, my thought is that you don't want to overdo the really volatile asset classes. If you are a "slice and dice" investor, you probably have emerging markets and small cap value along side your REITs. Those are three very volatile asset classes, but you wonder how much octane in your portfolio is too much. I have seen REITs fluctuate as much as 8%-10% in a single day.

I love REITs, I have owned them for years as well as Timber REITs. I believe strongly that they have a place in a diversified portfolio. Don't overdo it. 20% of a portfolio in REITs is an awful lot. My feelings are similar about Small Cap Value, I love the asset class but don't overdo it. Many posters have talked about the overlap of Small Value and REITs.

If memory serves me correctly, there are less than 200 publicly traded REITs in the United States (I think it is more like 150). It seems foolhardy to put a big chunk of a portfolio into a very narrow asset class.

So I feel like I am pushing the envelope with almost 10% of my portfolio in REITs, I certainly think 20% is too much.
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Re: REITs... buy more?

Postby michaelsieg » Fri May 03, 2013 10:06 pm

InvestorNewb wrote
Another reason I want to buy more REITs in my tax deferred account is to take advantage of the high dividends yields without having to pay any tax on them for years to come.

I think you just mentioned one of the reasons why REITS have a high valuation now. People are chasing dividend yields and allocate money they shoud be putting in bonds in REITS instead. I think this is concerning and personally I think is very risky to allocate 20% of your assets in any asset class without a well thought of and written IPS, especially if you manage your own money. This asset class has a similar risk as equities (at least that is how I think of them) and partly because people need dividend yields they are currently valued fairly high.
If after a thoughtful process you decide to really allocate 20% of your assets in REITS, you might want to consider cost averaging and shift your portfolio slowly to the desired asset allocation.
No offense, but reading your post makes me think to reduce my 5% REIT allocation...
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Re: REITs... buy more?

Postby otbricki » Fri May 03, 2013 10:23 pm

From about 2009 to a month ago I was 10 to 12% in VNQ. It has been the best performer in my portfolio over this time. It seemed like I was rebalancing out of it every time I rebalanced. Thanks Larry, I got the idea from your book on Alternative Investments. To me that book was worth five thousand times what I paid for it, and the count seems to rise every day.

I have this itch when something goes up a lot to get rid of it or cut allocation or reduce it somehow so I decided to diversify into 5% VNQ + 5% VNQI. I learned about the existence of VNQI on this site.
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Re: REITs... buy more?

Postby InvestorNewb » Fri Nov 08, 2013 10:10 am

Any ideas for why REITs have been tumbling this week?
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Re: REITs... buy more?

Postby Don125 » Fri Nov 08, 2013 10:47 am

One explanation I have is heard is interest rates. The thinking is today's good jobs report leads to an earlier Fed tapering. This leads to higher long term interest rates which somehow hurt REITs (because they are a yield investment). To me, this is all short term noise which doesn't affect the long term outlook for REITs.

Vanguard REIT Index ETF (VNQ) top is around May 20, 2013 with dividend adjusted close at 76.28. Dropped to 67.53 on Nov 7.
Treasury Yield 30 Years (^TYX) bottom is around May 2, 2013 at 2.83%. Rose to 3.73% on Nov 7.
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Re: REITs... buy more?

Postby abuss368 » Fri Nov 08, 2013 11:43 am

Check out the latest issue or REIT Magazine with the REIT King himself Sam Zell on the cover. You can access the issue here for your reading pleasure: http://www.reit.com

In the interview, Sam Zell thinks over the next 10 years or so International REITs are going to be big.

When experts like Sam Zell talk, especially about REITs, I listen.
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Re: REITs... buy more?

Postby gulliver » Fri Nov 08, 2013 2:36 pm

Here's another opinion on (domestic) reits:

viewtopic.php?f=10&t=115965
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Re: REITs... buy more?

Postby abuss368 » Fri Nov 08, 2013 2:40 pm

If REITs are out of flavor then back up the truck and rebalance into them while they are on sale.
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Re: REITs... buy more?

Postby InvestorNewb » Fri Nov 08, 2013 2:57 pm

abuss368 wrote:Check out the latest issue or REIT Magazine with the REIT King himself Sam Zell on the cover. You can access the issue here for your reading pleasure: http://www.reit.com

In the interview, Sam Zell thinks over the next 10 years or so International REITs are going to be big.

When experts like Sam Zell talk, especially about REITs, I listen.


They might be... but I'm more of a subscriber to the "Nobody knows nothing" philosophy, as Jack Bogle has said before.

Right now domestic REITs occupy 100% of my tax-deferred account.
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Re: REITs... buy more?

Postby Toons » Fri Nov 08, 2013 2:59 pm

Buy :happy
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Re: REITs... buy more?

Postby SpringMan » Fri Nov 08, 2013 3:13 pm

InvestorNewb wrote:Any ideas for why REITs have been tumbling this week?

Possibly because interest rates are rising due to good news, yesterday's GDP and today's October employment report. This good news increases the chance the fed will begin tapering sooner rather than later. Rising interest rates means mortgage rates increase adversely affecting real estate.
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Re: REITs... buy more?

Postby JoMoney » Fri Nov 08, 2013 3:43 pm

I have to say, REITs scare me right now. Maybe this is a good indicator for the contrarians ? :shock:
There seems to be an awful lot of REIT IPO's (including new-share offerings from existing companies), and non-traded REITs moving into the publicly traded markets, and companies that are not traditional real estate that are incorporating as REIT's (sometimes without getting an IRS ruling that it's acceptable for them to do so). The basic fundamentals seem very high. I very much prefer to be buying from companies that think there stock is so cheap they're doing buy backs than to be buying from companies that are racing to sell off new securities. REITs seem to be the place for businesses to raise capital very cheaply (i.e. investors will pay a high price/earnings). I'm no investment professional, but this doesn't bode well with me. If the music stops it may not be pretty. If it's part of your plan to over-weight this sector you might want to carefully consider why it is you prefer this sector/class of stock and make sure that the reasoning and conditions that lead you to that are still sound.

http://www.bloomberg.com/news/2013-10-2 ... -2004.html
"adding fuel to what is already the biggest year for U.S. real estate initial public offerings in almost a decade."

http://www.investmentnews.com/article/2 ... /130509951
"Investment advisers and their clients will reap a bonanza over the next two years or so as a number of large nontraded real estate investment trusts go public or are acquired."

http://finance.fortune.cnn.com/2013/04/ ... dividends/
"In the past six months, nearly half of all companies that sold shares through an IPO, or 26 in total, have paid a dividend. ... Dividends are not normally associated with the IPO market ..."

http://www.forbes.com/sites/tomkonrad/2 ... structure/
"By going public and converting to a REIT structure, HASI is tapping a pool of relatively low-cost capital from small investors."

http://www.bna.com/crown-castle-forges-n17179877114/
"recent announcement that it is taking steps to reorganize as a real estate investment trust—without the IRS's approval"

http://www.bloomberg.com/news/2013-06-0 ... plans.html
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Re: REITs... buy more?

Postby gulliver » Fri Nov 08, 2013 3:51 pm

abuss368 wrote:If REITs are out of flavor then back up the truck and rebalance into them while they are on sale.


Not to speak for the wise man himself, but Bernstein is not saying that REITs are "out of flavor[sic]." He's saying the exact opposite. In fact, they are so much "in favor" that they are "out of flavor!"
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Re: REITs... buy more?

Postby zaboomafoozarg » Fri Nov 08, 2013 3:57 pm

InvestorNewb wrote:They might be... but I'm more of a subscriber to the "Nobody knows nothing" philosophy, as Jack Bogle has said before.


If nobody knows nothing, then there's not much point to asking them why REITs have been tumbling this week...
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Re: REITs... buy more?

Postby abuss368 » Fri Nov 08, 2013 4:16 pm

JoMoney wrote:I have to say, REITs scare me right now. Maybe this is a good indicator for the contrarians ? :shock:
There seems to be an awful lot of REIT IPO's (including new-share offerings from existing companies), and non-traded REITs moving into the publicly traded markets, and companies that are not traditional real estate that are incorporating as REIT's (sometimes without getting an IRS ruling that it's acceptable for them to do so). The basic fundamentals seem very high. I very much prefer to be buying from companies that think there stock is so cheap they're doing buy backs than to be buying from companies that are racing to sell off new securities. REITs seem to be the place for businesses to raise capital very cheaply (i.e. investors will pay a high price/earnings). I'm no investment professional, but this doesn't bode well with me. If the music stops it may not be pretty. If it's part of your plan to over-weight this sector you might want to carefully consider why it is you prefer this sector/class of stock and make sure that the reasoning and conditions that lead you to that are still sound.

http://www.bloomberg.com/news/2013-10-2 ... -2004.html
"adding fuel to what is already the biggest year for U.S. real estate initial public offerings in almost a decade."

http://www.investmentnews.com/article/2 ... /130509951
"Investment advisers and their clients will reap a bonanza over the next two years or so as a number of large nontraded real estate investment trusts go public or are acquired."

http://finance.fortune.cnn.com/2013/04/ ... dividends/
"In the past six months, nearly half of all companies that sold shares through an IPO, or 26 in total, have paid a dividend. ... Dividends are not normally associated with the IPO market ..."

http://www.forbes.com/sites/tomkonrad/2 ... structure/
"By going public and converting to a REIT structure, HASI is tapping a pool of relatively low-cost capital from small investors."

http://www.bna.com/crown-castle-forges-n17179877114/
"recent announcement that it is taking steps to reorganize as a real estate investment trust—without the IRS's approval"

http://www.bloomberg.com/news/2013-06-0 ... plans.html


Thank you for posting the links in your response. I will definatley check them out. I have read some articles lately of business with non commericial buildings (i.e. equity) going the REIT route without IRS approval when doing so. Two of the recent trends has to do with Cell Phone Towers and Billboards!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
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Re: REITs... buy more?

Postby letsgobobby » Fri Nov 08, 2013 4:41 pm

InvestorNewb wrote:Any ideas for why REITs have been tumbling this week?

probably because you're watching them.
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Re: REITs... buy more?

Postby Jebediah » Fri Nov 08, 2013 6:56 pm

I ditched my REITS soon after the OP. Not because of the OP, but it didn't hurt.
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Re: REITs... buy more?

Postby Easy Rhino » Fri Nov 08, 2013 7:46 pm

hmm, the REIT peak was in may, wasn't it?

I dunno, were they even doing that well in may though? I looked back at my holdings, I look like a genius for the lots I bought in 2009, but the earlier and later lots are no great shakes.
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Re: REITs... buy more?

Postby InvestorNewb » Fri Nov 08, 2013 7:56 pm

zaboomafoozarg wrote:
InvestorNewb wrote:They might be... but I'm more of a subscriber to the "Nobody knows nothing" philosophy, as Jack Bogle has said before.


If nobody knows nothing, then there's not much point to asking them why REITs have been tumbling this week...


I think the saying is more in reference to forecasting and the future.
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