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Safest Reits To Invest In
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Unfortunately, very few individual investors can afford to simply buy a shopping mall or office building. But with REITs (short for real estate investment trusts), you can invest in these properties as easily as you can buy shares on the stock market.
In this infographic, we’ll cover the key points investors need to know about this interesting investment vehicle before starting or continuing your REIT investing journey, and even the ones you didn’t know. Finally, you’ll gain a clearer understanding of how to incorporate REITs into your portfolio and what to look out for.
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This article is for general information only and does not constitute an offer, recommendation or solicitation to enter into any transaction or to adopt any hedging, trading or investment strategy in respect of any securities or other financial instruments. This article is not written for any particular person or group of people and does not constitute and should not be construed as investment advice or investment advice. It has been developed without regard to the specific investment objectives, financial situation or specific needs of any individual or group. You should seek the advice of a licensed or exempt financial advisor as to whether the product is suitable for you and consider these factors before committing to purchase any product or make an investment. If you choose not to seek advice from a licensed or exempt financial advisor, you should carefully consider whether the products or services described here are suitable for you. You are solely responsible for your own investment decisions, including whether an investment is suitable for you. Relevant products/services are not covered by this principle, and you may lose all or part of your original investment amount. Standard Chartered Bank (Singapore) Limited accepts no responsibility of any kind for the accuracy or completeness of the information contained herein. Investment products are not deposits and each investment product listed does not qualify as a protected deposit under the Singapore Deposit Insurance and Policyholder Protection Act 2012, as amended. Edit capital 77B. Over the past decade, the U.S. has experienced historically low interest rates, making REITs with inherently high yields and low volatility an attractive so-called “bond alternative.”
But in reality, there are important differences between bonds and REITs that investors need to understand when deciding which asset allocation is right for them.
Let’s take a look at what those differences are, the pros and cons of each asset, and most importantly, what the right mix of bonds and REITs can mean for a retirement portfolio.
The most important difference between bonds and REITs is that bonds are fixed-income investments issued by governments and corporations that typically pay a fixed coupon (interest rate) every six months.
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These payments are usually fixed, so the value of the bond (traded daily in the bond market) is largely a function of time to maturity and prevailing interest rates (yields on long-term Treasury bonds and rates on similar bonds issued today). Bonds have a limited lifespan because they eventually mature.
Another important thing to know is that bonds are a higher priority in the capital stack, which consists of the total capital (common, preferred, mezzanine and senior) invested in the business.
In other words, bond investors receive preferential treatment in terms of repayments if the bond issuer runs into financial distress. Therefore, the risk of bonds is relatively low.
By contrast, REITs (see our in-depth guide to investing in REITs here) are a type of equity, which means they represent a fractional ownership of a company that owns commercial real estate and sends Tenants collect rent to make money.
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REITs are permanent investments with no maturity date and can theoretically continue to exist and expand their asset base for decades. Unlike bonds, REITs tend to pay increasing dividends over time as their cash flow grows, so they tend to have better capital appreciation potential than bonds.
So now that we know the basic differences between these two assets, let’s look at the pros and cons of owning both bonds and REITs.
Since 1900, stocks (including real estate investment trusts) have significantly outperformed bonds and cash equivalents such as T-bills, both in absolute terms and after adjusting for inflation.
The reason most financial advisors still recommend investors hold some bonds (more on that later) is because of the important role bonds play in your portfolio.
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Not only do bonds generate fixed income, but they tend to be much less volatile than stocks and have historically had a very low correlation with stocks. For example, between 1928 and 2017, the correlation between stocks and bonds was only 0.03, meaning that the two asset classes traded almost completely independently.
The benefit of such a low correlation is that owning some bonds can greatly reduce the overall volatility of a portfolio, especially when the stock market is going through one of the inevitable bear markets.
That’s why the default recommendation for most retirement portfolios (once you retire) is 60% stocks and 40% bonds. Such a portfolio has historically accounted for most of the upside of a 100% equity portfolio, but falls much less in years of stock market crashes.
1974 and 2008, the worst years for stocks since World War II, are good examples of what stable bonds can provide:
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So bonds, which tend to appreciate during market downturns (safe-off and falling interest rates), are a great way to smooth out total returns while generally enjoying healthy compounding.
Historically, a 60/40 stock/bond portfolio has captured the majority of 100% of the total return of a stock portfolio while significantly reducing the drawdown of the portfolio.
While historical data is a useful guide for long-term investment decisions, it’s important to remember that bond yields have been buoyed over the past few decades by an interest rate environment that is unlikely to last in the future.
Specifically, between 1981 and 2016, the 10-year Treasury yield fell steadily from a peak of nearly 16% to an all-time low (1.4% in July 2016).
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Bond prices are inversely related to interest rates, hence the asset class’s 35-year secular bull market, which has benefited fixed-income investors for most of our investing careers.
Looking ahead, the prospects for long-dated bonds look less attractive. In fact, at Berkshire Hathaway’s 2018 shareholder meeting, Warren Buffett noted that “long-term bonds are a poor investment at current rates, and at any rate that comes close to them.”
The yield on 10-year government bonds is around 3% today. Because the interest paid on these bonds is taxed at the federal level, they yield about 2.5% after taxes. If the Fed succeeds in meeting its 2% annual inflation target, the after-tax, inflation-adjusted returns on these long-dated bonds would be about 0.5% a year.
As Buffett puts it, long-term bonds at these rates are “ridiculous.” Investors considering buying long-term bonds need to keep this in mind, especially when looking at the historical returns of various retirement portfolio allocations.
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Future bond yields are unlikely to approach levels seen over the past few decades. So being too conservative with a large investment in long-dated bonds could leave a nest egg that doesn’t last long enough to cover full retirement expenses due to lower returns.
Like bonds, REITs have some pros and cons. Let’s look at the role REITs can play in delivering income growth and long-term capital appreciation in retirement portfolios.
Historically, REITs have been a reliable source of safe and growing income while delivering healthy total returns.
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