As we have discussed many times, much of the “conventional wisdom” on investing is simply wrong. For our purposes, we can define conventional wisdom as those ideas that become so commonly accepted that they go unquestioned. Today we’ll look at the idea that rising interest rates would doom returns to real estate investments, specifically the returns to real estate investment trusts (REITs).
This assumption, that returns from REITs will indeed tank if interest rates rise, is one I have been hearing a lot about lately as people speculate on the future actions of the Federal Reserve and projections for short- and long-term rates. This speculation seems to have reached even higher pitch (it that’s possible) ahead of the Dec. 16 meeting in which the Fed is expected to decide to raise interest rates.
As regular readers of my books and blog posts know, my writing isn’t based on my personal opinions, or anyone else’s for that matter. Instead, it is built upon findings from academic research, data and the historical evidence. However, before we dive into the data on interest rates and REIT returns, there’s an important point we have to cover, and that’s the difference between information and value-relevant information.
Information Vs. Value-Relevant Information
If you have information you think should impact the market—unless it happens to be inside information, on which it’s illegal to trade—that information is already embedded in the market’s prices. Thus, if the market expects interest rates to climb, the impact from rising interest rates is already reflected not only in the current yield curve, but also in the prices of REITs. It’s already too late to act on such information, because while it may be important information to have, it’s not “value-relevant” information.
To see evidence of the market’s expectation regarding rising interest rates, just examine the current yield curve. It’s about as steep as the historical average, with the difference between one-month bill rates and 10-year Treasurys now at about 2.3%.
With this understanding about the difference between information and value-relevant information, we can now turn to the evidence on the relationship between interest rates and REIT returns.
The Relationship Between REIT Returns And Interest Rates
To determine whether the conventional wisdom on the relationship between REIT returns and interest rates is correct, we can check the historical correlation of the returns between the Dow Jones U.S. Select REIT Index and five-year Treasury bonds.
For the period January 1978 to October 2015, the monthly correlation of returns was actually a positive 0.076. If we look at quarterly correlations, for the period January 1978 through September 2015, the correlation was 0.089. The semiannual correlation for the period January 1978 through June 2015 was even lower, at 0.023. And the annual correlation from January 1978 through December 2014 was lower still, at just 0.019. With correlations of close to zero, there’s really no basis for the belief in the conventional wisdom that rising rates are bad for REITs.
For another example of how the conventional wisdom associating rising interest rates with poor returns from REITs can be wrong, let’s look at some additional historical data. Specifically, let’s examine returns to the Dow Jones U.S. Select REIT Index during the last period of rising interest rates. The Federal Funds (FF) rate bottomed out on June 25, 2003, at 1%. Over the next several years, the Fed kept raising the FF rate until it peaked at 5.25% on June 29, 2006. On June 25, 2003, the five-year Treasury note was yielding 2.3%. On June 29, 2006, the yield had risen 2.9 percentage points to 5.2%.
How did REITs perform during this period of sharply rising rates? From July 2003 through June 2006, the Dow Jones U.S. Select REIT Index returned 27.68% per annum, providing a total return of 108.15%. During the same period, the S&P 500 Index returned 11.22% per annum, providing a total return of 37.57%.
Consider The Source
If rising rates are supposed to be bad for REITs (and for stocks in general), why did they produce such great returns? The reason is that the impact of rising rates on REIT returns depends on the sources of those rising rates. If rising rates reflect strong economic growth, then the expected returns to REIT investments might also be good.
This could be a reflection of stronger demand, as well as the likelihood of a falling risk premium, which causes valuations—for example, price-to-earnings ratios—to rise.
On the other hand, if interest rates are rising because inflation is growing faster than expected, the markets could become concerned that, in order to combat inflation, the Fed could begin tightening monetary policy. That would likely put a damper on economic growth, and probably cause a rise in the risk premium, which causes valuations to fall.
So we see that there are some periods where rising interest rates are more likely to be good for REITs, and some periods where rising rates are more likely to have a negative impact. That explains why the correlations have been close to zero over the long term.
The takeaway here is that, once again, we see that just because something falls under the conventional wisdom doesn’t make it correct. Hopefully, the lesson learned is to not simply accept the conventional wisdom as fact, but to question it and ask for the evidence supporting it.
This commentary originally appeared December 9 on ETF.com
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2015, The BAM ALLIANCE
Ask someone how they invest, and you’ll probably get a pretty standard answer involving stocks, bonds and maybe some real estate or cash. But rarely will people mention something that is even more important: their investments in human capital.
They don’t talk about it because human capital investments can look a lot like any other expenses. I’ve thought about this for years, ever since I attended the Financial Planning Association’s annual conference in 2010. It’s one of the largest annual gatherings of its kind, and that year, Ian Bremmer, the president and founder of the Eurasia Group, a leading research and consulting firm on global political risk, offered one of the keynotes.
Near the end of his talk, someone posed a question that always seems to get asked at this type of event, “How do you invest your money?”
It’s a funny question, because as my friend and colleague Tim Maurer says, “Personal finance is far more personal than it is finance.” So how Mr. Bremmer or anyone else invests doesn’t really matter to you personally. But financial planners can’t help themselves. We always ask this question.
After a pause, he replied, “I just hired another Ph.D. at my business.” Now, this answer didn’t tell me how he invests his personal wealth or what assets he owns, but it did tell me something else even more important. Mr. Bremmer invests in human capital. What some might call an expense, he considers an investment. Consider the fact that he just as easily could have said, “I own a diversified portfolio of low-cost index funds.” But he didn’t. He was asked how he invests his money, and the answer he gave has stuck with me for years.
Kyle Korver, a professional basketball player, made a similar choice in 2008. After Mr. Korver had some injuries, it looked like he was on the downhill side of his career. Then he started training at P3, the Peak Performance Project, in Santa Barbara, Calif., with Dr. Marcus Elliott. I have to imagine the training didn’t come cheap, either financially or in terms of time. But Mr. Korver was so committed to improving that he even moved his family there so he could stay close during the off-season.
His success since then makes it clear that his choice qualifies as an investment. In 2013 and 2014, Korver’s stats showed that he played the best basketball of his career — at the age of 33. He noted that his “body feels better now than it did at 23, and that doesn’t happen in pro sports.”
It’s another brilliant example of identifying what someone else might call an expense and understanding that it’s really an investment. Obviously, we’re not all experts on political risk or N.B.A. players, but we have similar investment opportunities.
I think about this way of investing every time I work with a personal coach. Yes, there’s a financial cost. I’m betting a lot of people would define the cost of such a coach as an expense, and the Internal Revenue Service certainly sees it that way when it comes time to itemize tax deductions. But I see it as an investment in myself.
Maybe for you it’s something simple like taking a class or two at the local college. Or maybe it’s more complicated, like moving to a new city to give your career a bump. In both instances, you can measure the results of these choices. A promotion at work or a new job would be a clear return on your investment.
To be clear, there’s a big different between real, human capital investments and expenses masquerading as investments. Yes, watching some great documentaries may help you learn more about the world and thus count as an investment. Buying a bigger television to watch those documentaries doesn’t.
It’s been more than five years since I heard Mr. Bremmer’s surprising answer. But it sticks with me to this day. He’s investing in human capital. I’m committed to making similar investments. So what kind of expenses can you turn into investments?
This commentary originally appeared November 30 on NYTimes.com
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2015, The BAM ALLIANCE
By Sylvia Nissenboim
Both caregiving for an elderly loved one and preparing for the holidays can come with a lot of joy, but also some unintended stress. As such, it’s vital that caregivers don’t overload themselves as they balance the day-to-day demands of caring for an older family member with the additional commitments that pop up around the holiday season. So what’s the best way to take care of yourself so you don’t burn out?
First a little background. Burnout is a state of physical, emotional and mental exhaustion that may be accompanied by a change in attitude, specifically from positive and caring to negative and detached. Sometimes we don’t even notice we are getting burned out until others tell us they see the symptoms. The most common symptoms of burnout are increased fatigue, stress, anxiety and depression. Taking care of an older family member can already deplete our stores of energy, and when the holidays come around, there’s sometimes nothing left to draw upon. Things that once brought pleasure (baking with the grandkids or decorating the table, for instance) now seem like chores.
Consider these tips to help minimize unnecessary stressors around both caregiving and the holidays:
First, recognize the signs of increased stress. Has your mood changed? Are you often down, irritated and angry? Are your sleep, attention and energy levels disrupted? Remember that stress is a supply and demand problem. It’s the result of too many requests and not enough resources (such as time, energy and attention) to meet them.
Second, try shifting your focus to what you can control. We can choose our attitude, and we can choose when we say “yes” or “no.” (Every “yes” is a “no” to something else when you are already loaded with responsibilities.) We have learned from scientific studies on the brain that a positive perspective increases energy, productivity and mood, so it’s important to focus on what’s appreciated and what we are grateful for. In addition, what you agree to do, or not do, can give you a sense of control in situations you often can’t direct. You can’t control, for example, the course of a family member’s condition, but you can control the commitments you make to others and ensure you are not overtaxing yourself. The holidays may be the perfect time to say “yes” to offers of assistance. A friend asking how they can help you out should be thanked and given a job, like picking up medicine or food the next time they go to the store.
And third, try honing the five resiliency skills taught by Al Siebert:
Prioritize safety and self-care. You can’t take care of others if you don’t first ensure that you are in good shape. Go to the doctor, go for a walk or get out with friends. Each of these things can be important to help sustain your own health and well-being.
Learn breathing and relaxation techniques. Relaxation breathing is a way to calm yourself when you feel particularly stressed or overwhelmed. Inhale through your nose for a count of three, and then exhale for a count of four (as if you were blowing out a candle). Complete four or five of these deep-breathing sequences, and you will be on your way to becoming calm enough to handle the task in front of you.
Communication is key. Talk with friends, family members, a counselor or a spiritual leader. Don’t hold everything in. You have more power when you let others carry some of the emotional burden.
Connect with different groups. Different networks of friends and acquaintances, whether they’re from the neighborhood, your book club or church group, refresh and renew us. Reach out.
Concentrate on optimism. Look for the good in the world. We feel what we focus on, so why not choose to see the positive qualities in the people around us? It’s easy to become inundated with bad news, so we have to work to keep optimistic, positive and grateful for what we have. This state of mind can help re-energize you and improve your attitude immeasurably.
The bottom line is that, to care for a loved one and make it through the joyous but sometimes stressful holiday period, we have to take care of ourselves. In doing so, we are making ourselves more emotionally available to the ones we love and care about.
Now, pass the pumpkin pie, please!
Sylvia Nissenboim, LCSW, is a licensed counselor and certified coach with more than 30 years of experience helping families care for aging parents through coaching, counseling and consultation services.
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.