Do you shape your opinion of the stock markets from the information you receive from the nightly news? If so, you may want to take a different approach. In 2011, there were many newsworthy events that all seemed like the end of the world was coming. From the U.S. credit rating being cut to the escalation of the European debt crisis, it seemed to go from bad to worse.
Flying under the radar during all of this market confusion is a sector that is rarely considered a wise investment these days. That sector is Real Estate. In fact, it has been so far off the radar that not only has the sector’s performance been a surprise to the average investor on the street, but also for many financial professionals. In a study, I asked 50 randomly selected individuals, how they viewed real estate as an investment over the past 3 years?
An overwhelming 48 of the 50 individuals surveyed felt that real estate investments struggled the past three years. The most common responses as to why were:
- Nightly news reports tell me how bad the real estate market remains.
- That mortgage mess.
- They know people that can’t sell their homes.
- News reports of foreclosures are heard frequently.
What if I told you that real estate was not only one of the strongest sectors is 2011 but over the last 3 years? I’m sure, like those I surveyed, you would be surprised. However, it is true. When viewed through the eyes of the average mutual fund performance, out of the 11 sectors that makeup our economy, only 2 had a stronger 2011 than real estate. I know the financial media seems to think the only positive to come out of 2011 was a 2.11% gain for the S&P 500 Index, but behind the scenes there was so much more going on in the markets. The average real estate mutual fund finished 2011 with a gain of 7.27%. This only trailed the average performance of healthcare and utility mutual funds.
Over the last 3 years (ending January 9, 2012) the average performance for real estate mutual funds is a gain of 95.84%. During that same period of time the S&P 500 gained 53.48%. Most people believe that when the mortgage crisis hit the markets sending them into a death spiral in 2008 that this collapse wiped out all real estate gains previously achieved throughout the decade. Again, this perception is based upon the housing market. However, the average performance of a real estate mutual fund over the last 10 years is still a gain of 161.55% vs. the S&P 500 which is up +34.83% in that same 10 years.
So why the disconnect between what investors perceive and what the real data is telling us? Individual perceptions are correct that much of what they hear about in the news is a negative…….but not for real estate investment professionals. The negative feelings expressed by those surveyed and heard about on the nightly news describe individual homeowner struggles and foreclosures. These are negatives for those that hold those mortgages. That ladies and gentlemen is a negative for the banking sector. I’m not about to start feeling bad for the banks because they shot themselves in the foot. It should be no surprise that based on these negatives that the average performance for financial mutual funds in 2011 was a loss of 14.57%.
The fact is real estate investment professionals have indirect correlation to the individual consumer. Much of what they invest in is commercial real estate. As the economy strengthens, occupancy rates increase at commercial and residential rental properties. Unlike individual homeowners who are underwater or having trouble paying their mortgages, most real estate investments have very little exposure to the mortgage markets. Residential REITs (Real Estate Investment Trusts) are a popular holding amongst real estate mutual funds and offer opportunities to offset the mortgage crisis. They are very compelling because landlords have pricing power over consumers who are afraid to take on homeownership or are unable to obtain financing in this tight lending environment. The real estate crisis did not handcuff real estate mutual fund managers, but rather provided opportunities to buy more properties at depressed prices and has allowed them to take advantage of their ability to diversify.
The key take away should be that without a properly allocated portfolio in place from the start then you will not know where the true strength lies in the market. We need to stop piling into investment ideas on an “after the fact” basis. Should you run out and invest in a real estate mutual fund based upon the data that I provided? No. You should ask yourself why you did not have a portion of your portfolio in real estate to begin with. My crystal ball does not work which is why I like to cover all of my bases. I asked my followers in this month’s newsletter: “Can any of you honestly say that you would own a real estate securities mutual fund or a real estate investment of any kind if you were not following a diversified approach like mine?” If you are waiting for the nightly news to tell you about a real estate recovery, then you will continue to wait.
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
