According to James Cloonan, founder and chairman of the American Association of Individual Investors (AAII), more and more individual investors are beginning to see the benefit of adding REITs to their portfolio.
In the May Issue of the AAII magazine, Cloonan reviewed a model ETF portfolio that focused exclusively on the equity allocation of a diversified investment portfolio and included nine separate ETFs representing domestic and international equity markets.
The Model ETF Portfolio included a 21 percent allocation to REITs - including a 16 percent allocation to U.S. REITs using the iShares Cohen & Steers Realty Majors ETF (ICF) - and another five percent allocation to international REITs using the SPDR Dow Jones International Real Estate ETF (RWX). As Cloonan noted in that article, the large real estate allocation “hurt relative performance when real estate was hit even harder than the overall market in 2008, but is helping now that real estate has begun to recover.”
In a recent conversation with REIT.com, Cloonan addressed some of the myths and misunderstanding that some retail investors have in regards to REITs.
“People think their house is a real estate investment,” Cloonan said. “They say, ‘well, I have a $300,000 or a $1 million house, so I’m already heavily invested in real estate.’ I think that’s a mistake. Homeownership just shouldn’t be an influence on someone’s portfolio.”
Cloonan says that another issue is long stand misperceptions about what a REIT is and how to invest among the individual investor community. This is a lost opportunity, according to Cloonan.
“I’ve always pushed real estate investments as being a reasonable part of the equity portfolio,” Cloonan said. “[In the long term] I feel that equity REITs perform the same as equities, but there is a nice diversification effect, so you’re able to get the same results with lower risk.”
The biggest deterrent to individual investors allocating capital to the listed real estate market right now is the perception that the entire real estate market is a mess, Cloonan said. He tries to show his investors that while the fundamentals may be troubled and single-family residential remains weak, REITs are typically a leading indicator of a market recovery.
“People see home values going down and think, ‘well, I can’t be in the real estate market, it’s a total disaster,’” Cloonan said. “But other people are making money in REITs. Shopping centers, medical facilities and all kinds of areas are doing very well. I think there is a big difference that people need to understand.”