After years of stellar performance, fears of rising interest rates have finally put the kibosh on real estate investment trusts (REITs) -- at least for now. The release of various bits of economic data, including today's stronger-than-expected reading on the non-manufacturing sector, has had REIT investors running for the hills instead of buying them.
The Dow Jones U.S. Real Estate Fund (AMEX:IYR) and the streetTRACKS Wilshire REIT Fund (AMEX:RWR), both good barometers of the overall REIT sector, are down about 4% today. And, many large REITs, such as Equity Office Properties (NYSE:EOP), are down more than 3%.
It appears that the piecing together of this economic data has resulted in a belief that the economy will be moving full steam ahead. That supposition could mean that the Fed, led by Alan Greenspan, may decide to get into the game -- raising interest rates sooner than expected.
So, what should you do with your REITs? Run for the hills! Get out while you still can! Sell, sell, sell! Just kidding.
Try this on instead: Certainly REITs have experienced some sizzling gains over the past few years, and many are pricey, but reasonable values can still be found, so don't panic.
The idea that anyone can accurately predict the nature of short-term interest rates is about as silly as the idea that anyone can predict the short-term nature of the stock market. Plenty of folks say they can do it -- some of whom are even delusional enough to believe it themselves -- but the truth is that it just isn't possible.
Sure, you might be lucky enough to guess right once, twice, or even three times. And, that's often enough to make the career of a Wall Street talking head. Heck, there are some pundits out there who are still coasting on the fact that they "called" the 1987 stock market crash, despite the fact that they haven't gotten a single thing right since.
Wow, is that all it takes? One lucky shot makes a long-term success? Well, that may be true for the pundits of Wall Street, but it isn't going to work for you and me, which brings us back to what we should do about our REIT holdings.
If you bought your REITs to add diversity to a well-balanced, long-term portfolio, then you should -- insert drum roll here -- do nothing. That's right, nothing.
First off, yields on REITs are still generally the best available in this market. Second, the fact that these investments tend to move independently of the overall market makes them an excellent diversification tool, and we don't simply abandon our diversification strategy because of short-term fluctuations, as that's the whole point of diversifying in the first place.
Last, do you really think the fact that interest rates are at generational lows has escaped the attention of most REITs? Me either. These are companies that tend to borrow great sums of money to fund their real estate purchases, so interest rates matter to them. To that end, many REITs, such as Vornado Realty Trust (NYSE:VNO) and Chelsea Property Group (NYSE:CPG), have already taken steps to insulate themselves from the long-term inevitability of higher rates.
The bottom line is this: Now may not be the time to load up on REITs, but you shouldn't let short-term gyrations and interest-rate speculation shake you out of a prudent long-term strategy.
Mathew Emmert is the author of Motley Fool Income Investor , where he's recommended several high-quality REITs to his readers. If you're interested in REITs that present compelling valuations, consider a no-obligation free trial.
He doesn't own stock in any of the companies in this story.
