It is ironic that US REITs year-to-date have outperformed US stocks, non-US developed market stocks, and emerging market stocks, as well as directly owned commercial and residential real estate. Only commodities have outperformed REITs so far this year.

VNQ, ICF, IYR and RWR are still down from 17% to 20% on a trailing 12-month basis, but they provide a 12-month distribution yield of from 3.90% to 4.75% which is more than the current 10-year T-Bond rate of about 3.70%.

How vulnerable REITs are to a reversal of fortune is unclear.  If the economy is as vulnerable to major recession as some say, the rental income of REITs may not prove as strong as expected, which would tend to lower the distribution yield.  Continued outperformance itself, would reduce the yield rate.  Rising interest rates due to inflation* could reverse the yield spread between REITs and T-Bonds, which would take steam from the REITs.

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I have not written in some time about a theme that I think is an important one. Skeptics could probably argue that the reason I haven’t written about it was that the recent facts have contradicted my belief, though the fact is just that I haven’t gotten around to it. So, to put the cards back on the table, it is time to talk about valuation cycles. Many people can tell you that the average market P/E over the long term is something like 15 times. Of course, “average” doesn’t imply that the P/E is always 15. About half the time it is higher, and about half the time it is lower. The trick is figuring out in advance which half is which. In behavioral finance, some would argue that the market follows long-term trends in valuation. Rising valuations spark investor interest, and additional investors adding money to the market causes ...

Investors should think about volatility as well as mean returns when planning and analyzing their portfolios.

If we could remain investors for long periods, and did not need to take money out for any reason, then volatility would be of less concern. However, the shorter the time horizon for expected withdrawals, the more important volatility (return standard deviation) becomes.

Standard deviation is an important factor in the retiree question; “Can I outlive my money?”

Proper allocation among asset classes in light of volatility is a critical aspect of portfolio design for investors who have changed, or are about to change, life stages from accumulation of assets to consumption of assets.

Real world distribution of investment returns is not so perfectly symmetrical as in the diagram below, but that “normal” distribution “bell curve” is the basis of portfolio theory about volatility risk, measured by standard deviation of returns.

Actual distributions for overall markets

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