Time to buy REITS?


Thinks s/he gets paid by the post
Mar 14, 2004
As I have indicated before, I like balance index
investing. However, I also like REIT stocks and
did pretty well in several of them years ago.

I don't want the risk of individual stocks anymore
but Vanguard's REIT fund may scratch the itch, and
I would like to add some to my IRA.

Is the fund a good buy at today's price ($16.47)?
The income distributions have been remarkably
stable over the past 5 years averaging $.80 per
share with a max of $.82 and a min of $.76. At
$.80 per share it is about like buying a 5% very
long term bond, except that there is very little
correlation with bonds or stocks. The meger amount
of data did not show any income growth.

Previous posts on this subject seemed to average
about 10% of your total port as a resonable amount
to invest. That seems about right to me as well.

As a class, REITS are volatile and seem to me to be expensive right now. What is a good strategy to get in. Plunge, DCA, Value Average, Wait?

Should REITS be considered as part of your bond mix,
or SCV? I believe that it would be best to just let
them stand alone and do the balance thingy with your
other assets.

Thanks for your help.


If you pull out your 4 pillars book from under your bed, you'll find out all your answers. I just committed 10% of my stock allocation to the Vanguard REIT Index Fund.

According to Berstein, nobody knows if it's time to get in, but if REITs are part of your Asset Allocation Plan. Then Rebalance them in. The nice part about sticking with an asset allocation plan is that you don't have to constantly worry about this stuff. If you worry about it, you'll only screw it up.

If someone claims to know when it's time to buy then back away slowly and then run as fast as you can.

Back in 98? after Bernstein's article on 'Falling REIT correlations' I switched my trad IRA into Vanguard REIT index - about 6-7% of my total IRA(trad+rollover) and promptly got my lunch handed to me - they have since come back to the 15% range. No rebalancing yet because - didn't want to combine trad and rollover. 20% is my 'ceiling' to reallocate in some way.

Hindsight being 20-20, if your situation permits, I would recommend Cut-Throats suggestion - fixed allocation in the 10-20% range with rebalancing.
I'm at 10%, although if dividend/interest rates stay low I may consider shifting slightly more into REITS and HY corps. Since I'm not touching principal, I dont care about the navs much (well a little, but a 10-25% rolling around isnt going to make me jump out of the window...which are all first floor anyhow).
Thanks all,

I have just about decided to put my toe in the REIT
door and build up over the next 3 years. I just can't
stand to buy something that looks too expensive to
me. I feel the same way about TIPS. Maybe we will
have a correction in both asset classes within the
next 2-3 years and give me an opportunity to be
more agressive. In the mean time I will roll along
fat, dumb and happy with my Target Retirement


I felt REITS were too expensive back in january when I bought them. They're one of my best performing assets right now, up 10% since then. So I guess that means they're REALLY expensive right now.

I hold that in my IRA, so I only care what its worth in 20 years when I'll be taking it out.
Charlie, I'm in the same situation. I'm holding out on REITS as they seem overdue to take a breather, and I'm waiting for higher yields on TIPS. I have a wad in cash waiting to go in. I'm conflicted about having so much cash, earning so little, and have considered holding it in the Vanguard ST Corp Fund while waiting, but haven't decided yet. I'm also conflicted about waiting for a better deal, but it just seems to me that with rates so low, now may not be the best time. I don't feel at all confident about it though.

Of the many posters to this forum, where would you put your investment philosopy. I'm not pure but 70-80% Boglehead balanced index with a minor in Buffett/Ben Graham. My portfolio goal is to provide a third income stream that can be varied somewhat below a calculated SWR cap(4%) to provide the 'fun' in ER. Pension plus dividend stocks plus 'to be early SS in two years' are the 'floor'. Things changed quite a bit over the years from age 49 to 60(now). So I had to sit down and focus on 'What do ''I'' need this portfolio to do( ie what's its job). Then I looked at the market.
I find myself agreeing with Bob_Smith and unclemick
most often. I will be 70 this spring, but I have been
drawing on my IRA since '89 when I ER'd at 55. In
my case, I would be converting some of my
Target Retirement 2025 to buy TIPS and REITS. At
this stage in life, I just don't feel very comfortable
plunging into these assets when my gut tells me
to go slow. I know both are doing well right now
and I am a little green with envy. However, after
years of buying funds with a rear-view mirror, I know
from my experience that it pays to be patient. My
target to buy the REIT fund is when the yield reaches
6% and I will buy TIPS when real yields back up to
about 2.5%. In the meantime, I hope to hold my
gambling instinct in check and be content with the
guaranteed market return of the 2025 fund.

Thanks for your comments!

However, after years of buying funds with a rear-view mirror,  I know from my experience that it pays to be patient.
Charlie, I think you've just defined wisdom.
about 1.5 years ago I bought some REIT stocks. And they've done very well. So well that their price per share values are way up and the dividends percentages are way down. But the dividends are nice; although they are fully taxable. That's why I think that this might not be the time to invest in REITs. If looking for dividends, there are other stocks out there that have good dividends and are only taxable at the 15% rate.
Stocks such as MO, GE, SLE, XOM and some of the bank stocks pay good consistent , increasing dividends.

Any who - what I have right now are ANH, EOP, HCP, FRT, NNN, and ASN. HCP just split 2 for 1.
ANH is yielding > 9 %, but it's a volatile mortgage REIT.
Check them out and see what you think.

When I turn 59.5 in another 2 years, I'll probably convert my Vanguard 401k to an IRA and buy some of the Vanguard REIT, among others.
Cheers, Ray

Of the many posters to this forum, where would you put your investment philosophy.
Unclemick, I have read many, many investment books (hundreds) and articles (probably thousands) over the years. I consumed everything I could get my hands on and quit reading about four years ago. I was writing myself then (while working full time), and just got burned out on the subject. With so much talk here about Four Pillars, I'm going to come out of hibernation and read that. But of everything I've read so far, Bogle makes the most sense to me. Your posts are always right on target and very similar to my views on investing.
Of late I have been concerned about the apparent
lack of dividend growth in Vanguard's REIT index
fund. The prospectus and most recent annual
report indicate that the dividend per share from
net investment income has been flat at about
$.67 since 1999. Checking the website, I found
that the PE of the fund was about 25 and the
earnings growth is -1.9% . Then I checked on
the top 10 holdings of the index and found that
on average the companies yielded about 5% and
had a 5% dividend growth rate, more or less.
The PEs of the top 10 were in the range of 10-15.

This discrepancy worried me so this morning I
sent a letter to George Sauter, the fund manager,
asking for an explanation.

Stay tuned.


I don't know what kind of a response you will get from the portfolio manager of the reits, but what I am afraid of is a possible bubble in reits. They have had a fantastic run for the last few years, and I recently took half of mine off the table, later part of Dec. They have been up almost 10% since then. (Typical).
They are a little scary for my blood now though. (Not entirely convinced, or I would have sold them all).


Charlie, I'm not sure why you would focus on P/E, dividend growth, or any other traditional stock metrics when looking at REITs. REITs are completely different animals, and they don't even have to invest in real estate (for example, some REITs just play the spread between mortgage rates and other debt rates).

If you bought income property, would in make sense to look at the valuation in the terms you're thinking of?

My point is that there is an apparent discrepency
between the data reported on Vanguard's website
and the data I found by investigating the fundamentals
of the top 10 holdings of the REIT index fund.

I know that REITS are a different animal, but
dividends and dividend growth determine the
fundamental value of any financial instrument.
You can evaluate the intrinsic value of any
stock by using the traditional dividend discount
model derrived from the Gordon Formula. REITS
are no different. There is a very interesting website
at REITnet that provides a calculator and fundamentals
for all the REITS in the Index.


According to the dividend discount model, NLY (a REIT that plays a rate spread) should be valued at 1105! That would make it a screaming buy at 20 :)

Personally, I wouldn't buy a REIT unless I understood the underlying assets and business model. Only then can you tell if it's under- or overvalued.
Being pure in theory and less than pure in actual practice - here's my two cents:

Apples: ala Bernstein in IRA I have Vanguard REIT index ballpark 15% of total - with the intent of maintaining 10 - 20% range asset allocation by rebalancing when required.

Oranges: hobby stocks - New Plan Reality Drip which I think is too high (26-27) to add cash right now.
IMHO - why you buy is as important as what/when you buy. To repeat for my own benefit 70-80% balanced index for ER. The itch - hobby stocks with a strong bias to dividend plus div. growth. And I still believe there's a male hormone thing that impells hobby stock putzing/investing.
I must channel my male hormones in other directions.
Fishing for example.

To paraphrase (post ER).........I never met a stock I didn't dislike!
That's a bit hyperbolic but you get the idea.

John Galt
personally, I wouldn't buy a REIT unless I understood the underlying assets and business model.   Only then can you tell if it's under- or overvalued.[/quote]


I totally agree with your comment above. The
dividend discount model is just a tool to use.
When buying an INDEX of stocks, I believe it is
a perfectly appropriate tool to estimate fair
value. The example cited in your last post is
not typical of the equity type REITS in the
Morgan Stanley REIT index used by Vanguard.

BTW, for those of you who are interested, an
excellent reference on REITS is a book called
"Investing in REITs" by Robert L. Block. You
might also look at WWW.REITnet.com. This
website has a dividend discount calculator and
a data base of REIT stock fundamentals. It
also contains a basic explanation of the nature
of REITs.

Wab, all I am trying to do is point out that I think
there is a poblem with the data presented on
Vanguard's website. It is at least misleading.
As you might guess, I am a careful investor and
it worries me when something doesn't smell right.


As an investor in vanguards reit fund, i'm a little concerned about the numbers not adding up. I dont think its anything nefarious, just a sloppy screwup. The investing world appears to be rife with sloppy data screwups. The only problem is there are a lot of people who make big decisions on such bad data.

As far as it being time to buy reits, I'm going to take some money off the table with my vanguard reit investment in April. I'm getting a nosebleed from the price. Havent decided where to slide it, but I'm thinking small cap value or emerging market.
I know the good folks over at FundAlarm seem to think REITs are a tad overvalued... that's probably because they are very attractive if you want an income stream. But they're getting a bit pricey now... M* says Vanguard's REIT fund has a yield close to 5% which isn't great historically.

There's a lot of money out there chasing asset classes. I've been trying to find the undervalued one but it's getting difficult.
Thanks for all your comments.

I have not heard from the REIT fund manager or
a flunky yet, but decided to go ahead and start
value averaging into the REIT fund at the rate
of $5000 each quarter. This will take about
3 years to reach my goal, mas o minos, depending
on the whims of the market. If the REIT fund
tanks 10-15% I will probably jump in with both
feet. If the fund manager ever responds to my
letter, I will let you know.


Charlie (aka Chuck-Lyn)
Has anyone noticed that the Vanguard REIT Index
fund has dropped 4.8% in the last 2 trading
sessions? The fund seems to be trading like a
long term bond fund with respect to perceived
risk of rising interest rates. For those of you
who have been keeping your power dry, get


Charlie (aka Chuck-Lyn)
Rising rates are supposed to affect REITS like a bond fund, but LATER and generally AFTER rates have already gone up.

I think its just after the end of Q1 and with the reit runup some people are taking some money off the table. Check the fund in and outflows, I'll bet the outflows just added a zero on the end.
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