In my experience, many retirees like to invests in REITs. Some of the reasons many retirees invests in REITs are:
- They tell me that REITs are safer because underlying is backed by properties.
- REITs are safer because of rental income which is easy to understand.
- Even if the REITs' prices drop, it is ok because the investor still get an income and as long as they don't sell it, the capital lost is just paper lost.
But what they don't realised is that it has a volatility that could be even higher than stocks!
Consider the chart below which is a comparison between the volatility of Nikko STI ETF and Lion-Phillip S-REIT ETF. You'll notice that that the volatility of the REIT ETF far exceeds the broad market during the covid19 financial crisis for nearly six months in 2020.
So is REIT safe? I think it is better to address the misconception.
- The underlying is backed by properties and also financed by debt. Do not forget about the debt! Much of this debt could be short term loans. Remember during the financial crisis some REITs got into big trouble because they cannot refinance their debt when credit dried up.
- The pursue of income is what behavior finance called 'Self-Control'. It is an irrational behavior. What is more important is the total return. That is the capital is also important which brings me to the next point...
- There is no difference between realised and unrealised losses. In the west, these two values are not the same because of capital gain tax or tax loss harvesting. In Singapore, there is no tax on gain and tax refund on losses. Hence, a paper lost is not virtual - it is reality! So do not bluff yourself into thinking a paper lost is merely virtual.
That is why financial education is so important.
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