A common belief that has popped up in the last few years is that everyone should allocate a lot of money to REITs. There are some that advise 10-20% to REITs as being appropriate.

The 10-20% idea has never made sense to me. I have been writing about maintaining a moderate allocation for a long time.

The context here would be pretty much every type of REIT except mortgage REITs which I have never liked and timber REITs which rightly or wrongly I view as different. Am I am talking about malls, storage, office parks, warehouses, apartments and the like.

This chart reveals that domestic REITs have had a miserable few months, foreign REITs have struggled a little while the S&P 500 nets out flat. Folks who listened to the 10-20% crowd are either lagging badly or have had to be very right elsewhere in their portfolios.

I think this is analogous to putting 20% into commodities, all the studies saying this is a good idea notwithstanding.

I am a huge fan of REITs and have been for a while but believe in a moderate allocation. Clearly interest rates going up is not a good thing but I would not have thought they would have dropped by this much but only having one REIT at about a 3% weight (maybe a touch less now) means I didn’t have to be right about the magnitude of the decline. The one REIT I use across the board is down 20 something percent and while that is a bummer (recurring theme here) there has been no real damage done overall.

One reason I don’t load up that REITs have almost no presence in the S&P 500 (I scanned this list down to SLM corp and didn’t see any) so the way I view things adding a few percent can add some value but adding too much amounts to a big bet.

The other thing is that with rates coming off all time lows and still being historically low it hasn’t been a great place to be heavy. For anyone with no exposure it might be a good time to add a little. Prices are down 25% and while I have no idea if they will go lower they are a lot cheaper than when Sam Zell sold Equity Office.

Last 5 posts by Roger Nusbaum

• The Big Picture for the Week of November 15, 2009 - November 14th, 2009
• Process Drilldown - October 23rd, 2009
• Sunday Morning Coffee 10-18-09 - October 18th, 2009
• A Little Followup From This Morning - October 8th, 2009
• Wednesday Roundup - October 7th, 2009