Panic! Panic! Panic!
music selection: “Cradle To The Grave” — Five Finger Death Punch
I am getting a lot of panicky emails from readers as the market goes through a normal 10% or so correction. Really, you should be prepared for a 10% decline every 6-9 months or so. I have some generalized advice for those of you who are emotionally disturbed by the downturn. It is a sure bet you don’t have enough allocated to income and have too much allocated to equity. I see lots of investors who think they are “buy and hold” types that are realistically “buy and fold” investors. They think they have an iron stomach when the times are good and find out reality is a bitter pill when the markets are in decline. Income investing insulates you from market gyrations as you know you will have money to spend without having to sell into a market decline.
Today, I want to talk about one of my favorite income centric investments, Real Estate Investment Trusts (REITs). These are companies in the real estate sector that have taken a tax election that allows them to exempt themselves from federal income tax in exchange for making large distributions of operating cash flow to shareholders. Some are in the real estate leasing business both residential or commercial and some are invested entirely in mortgage securities (mREITs). Both pay steady streams of income to investors, especially the ones who are patient. I personally manage my portfolio in early retirement so that 122% of my annual budgetary requirement is met by passive income from dividends, distributions, and interest. I shrug off market volatility because I know that while my net worth might decline, my spending is safe.
The simplest and most conservative way to invest in the sector is to index yourself with Vanguard’s product “Vanguard Real Estate ETF” (VNQ). This is an attractively priced security with a weighted average P/E of 7.00. In addition to being cheap, it currently yields 4.29%. You can expect a long runway of price appreciation and distribution growth with this ETF to go along with best in class diversification within the sector.
