Articles for Financial Advisors

Growth of $10,000

Growth of $10,000

The table below shows growth of a $10,000 investment in each of several categories. Notice the disparity between equities and fixed income.

Growth of $10,000  [1972–2016]

Small cap stocks


Long-term gov’t bonds




Med-term gov’t bonds


EAFE stocks




Large cap stocks





Although no one really needs a sector fund, some funds are so useful they merit further consideration. Real estate funds, which mostly invest in equity REITs, can add variety to a portfolio. They are technically sector funds, but they play such a distinct role in a portfolio that they deserve to be treated separately.

The average equity REIT now has a high correlation with the S&P 500 Index (75%, 10 years ending 12/31/2016); when the S&P goes up or down, real estate funds are likely to move roughly in sync with the index. For the same period of time, equity REIT returns were slightly negative to long-term government bonds. Since 1976, the highest 5-year correlation between REITs and the S&P 500 was 2008–2012 (~ 0.82); ~ 0.44 was the highest between equity REITs and long-term bonds (for the period 1976–1980).

REITs bring in a lot of income, but they are required by law to pay out most of that income as shareholder dividends (4.0% in January 2017). Real estate funds are also more tax-efficient than other income offerings such as bond funds because, for accounting reasons, part of their dividend may be considered a return of capital. That means not all of the yield paid by a real estate fund will be treated as taxable income.

Do not use real estate stocks (or funds) instead of bonds. Although they are not as wild other sector funds, they are too volatile to provide the kind of sanctuary a bond fund would offer. When the economy buckles, real estate stocks can suffer severely: -16% (2007) and -39% (2009).


Previous Post
Housing Prices vs. REITs

For Advisors by Advisors. Browse all Programs.