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Real Estate Investments Revisited

Real Estate Investments Revisited
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David John Marotta of Marotta Wealth Management, Inc. published a column in 2010 entitled “Now’s Still the Time to Buy a House.” Looking back, one can see that his prediction about real estate was outstanding.

He advised a year ago, “If you are looking for an easy recommendation for an investment vehicle, try the Vanguard REIT [real estate investment fund] exchange-traded fund [ETF] (symbol is VNQ). The expense ratio is only 0.15 percent, and the yield is 3.6 percent. This is by far the simplest way to take advantage of this trend.” The 12-month return on VNQ has been 22.7 percent compared to the S&P 500′s return of 17.2 percent, using that objective measure..

Marotta Wealth Management, Inc. currently invests about 23 percent of their allocation to hard assets in VNQ. For a normal American 40-year-old, 17 percent would be invested in hard assets and 3.91 percent in VNQ. An allotment of less than 4 percent in VNQ may seem small since the majority of Americans do not have a balanced portfolio that uses all six asset classes. MWC’s allocation to VNQ overweights REITs by 9.2 times the normal U.S. stock allotment.

A typical 40-year-old using our services allots 32.2 percent to U.S. stocks. Financials embody 15.5 percent of the U.S.stock market. REITs embody about 9.5 percent of the financial sector. Therefore, the majority of investors mimicking the S&P 500 only have 1.5 percent in REITs. Because our U.S. stock allocation is only 32.2, those investors would only have 0.5 percent of their portfolio invested in REITs. Therefore our additional 3.91 percent allocation overweights REITs by 9.2 times.

Marotta’s father’s investing advice was “Make half a mistake.” These calculated allotments to overweight some sectors of the economy are attempts to balance the longing for superior return against the mistake of making all investments in one place.

Inexperienced investors holding only five funds may put 20 percent in REITs. Maybe that would do well, but there are many sectors to overweigh, and there are gains to be made from rebalancing between diversified allocations. Actually, a study by David Swensen, chief investment officer for Yale University, reveals that their endowment earned an additional 1.6 percent annually because of rebalancing their investments.

In July 2009 Marotta suggested to readers that now it was time to buy. He wrote, “Nathan Rothschild offered the contrarian advice to ‘Buy when there’s blood in the streets and sell to the sound of trumpets.’ It is time to consider buying residential real estate. The bottom is forming, although it may continue to do so through early 2011.”

Now in the spring of 2011, Marotta thinks we have reached the bottom and we can see that the housing market is beginning to pick back up. He writes that he has personally purchased two properties in the last six months that he hopes will offer good returns going forward. But for those who are looking to simplify their lives, he highly recommends purchasing some VNQ.

Marotta wrote last year, “I’ve heard a number of bleak predictions for the housing market recently. Everyone is expecting real estate to underperform the stock market for many years going forward. Maybe they are right.” Now, however, we know they were wrong.

Markets have the ability to turn quickly. Marotta cautions investors not to miss this opportunity to look for a great real estate deal.

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About Drew Wilson

Drew focuses on the Commercial and Mortgage/Finance categories.

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