As stock markets tumble around the world, here’s something your money guy may not have told you: No, stocks may not produce the best long-term returns. That distinction may go instead to real-estate investment trusts, or REITS.
Real-estate investments overall have beaten stocks by more than a full percentage point per year, on average, since 1960, according to recent analysis conducted by researchers in the Netherlands.
In “Historical Returns of the Market Portfolio,” issued last year, researchers Laurens Swinkels of Erasmus University, Rotterdam, Trevin Lam of Rabobank, and Ronald Doeswijk, looked at the performance of worldwide financial assets for the modern era, from 1960 to 2015.
During that time real-estate investment companies and trusts have beaten inflation by an average of 6.43% a year, compared to 5.45% a year for global stocks.
Over an investment period of, say, 20 years, that gap would be enough to raise your total returns by a third.
Real estate beat stocks during recessions and economic expansions and during periods of rising inflation and falling inflation, the researchers found.
While real estate’s returns were slightly more varied than those of the global stock market, it’s hard to argue from the data that it’s a riskier asset. Its worst year wasn’t quite as bad as that of stocks, its best year was better than the best year for stocks, and during all that time it had fewer really bad years, meaning years when you lost more than 10%.
(Among the other two major asset classes studied by researchers, incidentally, non-government bonds have earned 3.5% a year and government bonds 3.06%.)
Real estate’s returns per decade have been remarkably consistent, too. From the 1960s till recently, they’ve had only one really bad decade: The 1990s, when real returns were barely above zero. (And that, in turn, marked the reversal of the 1980s mania, especially in Japan.)
Other than that, real estate has produced real returns in each calendar decade of around 6% to 7%, the researchers found.
By contrast global stocks flopped in the 1970s and again in the zeroes, actually losing ground from 2000 to 2010.
The global real-estate sector has fallen further than global stocks so far this year, according to data company MSCI. The MSCI World Real Estate Index has fallen 6.5%, compared to 5.05% for the World Stock Index.
There are three important features of the research that investors need to remember. Firstly, the study related to global assets, not simply those in the U.S. Investors hoping to capitalize on these findings need to invest in global REITs. (Such as, for example, the iShares Global REIT exchange-traded fund, iShares Global REIT ETF (REET).
Secondly, the study focused only on listed commercial real estate. Private residential real estate — the value of your home — is a separate matter. In countries like the U.S. and the U.K. the majority of residential homes are owned by their occupants. Thirdly, as with all investment research, the past may be a guide to the future but is not a guarantee.
Nonetheless it makes a strong case for adding more REITs to our portfolios.
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