Here's Why You Should Own More Real Estate Next Year
By Peter Churchouse, editor, The Churchouse Letter
Monday, December 18, 2017
As we approach the end of the year, it's time to steel your resolve about ways to improve your life and your portfolio.
And adding real estate is one of the easiest ways to boost your income as we head into 2018.
Let me explain...
Given how essential and central real estate is to everything, you'd think that its importance would be reflected in the average stock portfolio.
Just consider this... You live, work, and sleep in real estate. The hotel where you stay on your vacation is real estate (not to mention the airport or train station that you use to get there). That tiny tech startup in the garage uses land. The stores you shop at use land. Wherever you live – that's using land.
Real estate underlies nearly everything in modern civilization. But you wouldn't know it from looking at the markets.
In fact, real estate – that is, everything from real estate investment trusts ("REITs"), to developers, to real estate holding companies – is hugely underrepresented in stock markets around the world.
For example, take a look at the MSCI All Country World Index ("ACWI"). This is one of the largest aggregate global equity market benchmarks available. It tracks large- and mid-cap companies across 23 developed markets and 24 emerging markets. And it includes nearly 2,500 stocks.
The chart below demonstrates how the MSCI ACWI is broken down by sector. As you can see, the three largest sectors are financials, information technology, and consumer discretionary (that is, nonessential consumer goods and services). Meanwhile, real estate is one of the very smallest slices of the pie – just scraping past telecoms with 3.1%...
The MSCI ACWI isn't the only index with such a small weighting toward real estate. In the S&P 500 Index, for example, it makes up just 2.9%.
"But wait," you might say. "I own my home – don't I have enough real estate?"
When it comes to personal wealth allocation, a lot of investors only factor in the physical real estate that they own – whether it's the roof over their heads or an investment property. And they'll think, "I'm covered with real estate – so I won't bother putting it in my stock portfolio."
This is understandable. But it's wrong. You see, your physical real estate returns are tied to whatever city or area you're living in.
And limiting your real estate investments to the home you live in is like limiting your stock investments to the companies located in your city. It's the opposite of diversification.
In fact, this is the epitome of "home bias" – the tendency of investors to gravitate toward their domestic market, rather than diversifying globally. (And in this case, it's literally "home" bias!)
Real estate stocks and other listed real estate securities offer you a couple of additional advantages, from an investment perspective, over the roof over your head...
One of the biggest is that they give you hassle-free income. Owning physical real estate has a lot going for it. But being a landlord can be a real headache. Chasing down tenants for rent, finding new ones when they move out, paying for repairs, taxes, and maintenance... it's time-consuming and messy.
But real estate holding companies (and REITs in particular) offer you a much easier way to be a "landlord." And the rent collection is automatic – dividends just slide straight into your brokerage account.
What's more, you can buy properties that you'd never be able to if you were investing on your own. Few of us will own a piece of a prime downtown Manhattan office building or a luxury mall in Beijing. But real estate stocks offer you an easy way to do just that.
So as we near 2018, take a look and see what kind of real estate exposure you have.
And if you're looking for reliable, dividend-paying stocks backed by realassets, then think about adding property companies to your portfolio next year.