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RED FACES IN PARK
London, Oct. 30
Secret lovers were locked in a midnight embrace when it
all happened.
Wedged into a tiny two-seater sports car, the near-
naked man was suddenly immobilised by a slipped disc,
according to a doctor writing in a medical journal here.
Trapped beneath him his desperate girlfriend tried to
summon help by sounding the hooter button with her
foot. A doctor, ambulancemen, firemen and a group of
interested passers-by quickly surrounded the couple’s
car in Regents Park.
Dr. Brian Richards of Kent said: “The lady found
herself trapped beneath 200 pounds of a pain-racked,
immobile man.
“To free the couple, firemen had to cut away the car
frame,” he added.
The distraught girl, helped out of the car and into a
coat, sobbed: “How am I going to explain to my husband
what has happened to his car?”
—Reuters
Investors are often torn by a similar confusion of
priorities. You can’t seek safety of principal and then take a
plunge with investment into the riskiest of common stocks.
You can’t shelter your income from high marginal tax rates
and then lock in returns of 6 percent from taxable corporate
bonds, no matter how attractive these may be. Yet the annals
of investment counselors are replete with stories of investors
whose security holdings are inconsistent with their
investment goals.
EXERCISE 6: BEGIN YOUR WALK
AT YOUR OWN HOME—RENTING
LEADS TO FLABBY INVESTMENT
MUSCLES
Remember Scarlett O’Hara? She was broke at the end of the
Civil War, but she still had her beloved plantation, Tara. A
good house on good land keeps its value no matter what
happens to money. As long as the world’s population
continues to grow, the demand for real estate will be among
the most dependable inflation hedges available.
Although the calculation is tricky, it appears that the long-
run returns on residential real estate have been quite generous.
We did have a bubble in single-family home prices during
2007 and 2008. By the second decade of the 2000s, however,
home prices have returned to “normal,” so it is again safe to
enter the market. But the real estate market is less efficient
than the stock market. Hundreds of knowledgeable investors
study the worth of every common stock. Only a handful of
prospective buyers assess the worth of a particular real estate
property. Hence, individual pieces of property are not
always appropriately priced. Finally, real estate returns seem
to be higher than stock returns during periods when inflation
is accelerating, but do less well during periods of disinflation.
In sum, real estate has proved to be a good investment
providing generous returns and excellent inflation-hedging
characteristics.
The natural real estate investment for most people is the
single-family home or the condominium. You have to live
somewhere, and buying has several tax advantages over
renting. Because Congress wanted to encourage home
ownership and the values associated with it, it gave the
homeowner two important tax breaks: (1) Although rent is
not deductible from income taxes, the two major expenses
associated with home ownership—interest payments on your
mortgage and property taxes—are deductible; (2) realized
gains in the value of your house up to substantial amounts are
tax-exempt. In addition, ownership of a house is a good way
to force yourself to save, and a house provides enormous
emotional satisfaction. My advice is: Own your own home if
you can possibly afford it.
You may also wish to consider ownership of commercial
real estate through the medium of real estate investment
trusts (REITs, pronounced “reets”). Properties from
apartment houses to office buildings and shopping malls have
been packaged into REIT portfolios and managed by
professional real estate operators. The REITs themselves are
like any other common stock and are actively traded on the
major stock exchanges. This has afforded an excellent
opportunity for individuals to add commercial real estate to
their investment portfolios.
If you want to move your portfolio toward terra firma, I
strongly suggest you invest some of your assets in REITs.
There are many reasons why they should play a role in your
investment program. First, ownership of real estate has
produced comparable rates of return to common stocks and
good dividend yields. Equally important, real estate is an
excellent vehicle to provide the benefits of diversification
described in chapter 8. Real estate returns have often
exhibited only a low correlation with other assets, thereby
reducing the overall risk of an investment program. Moreover,
real estate has been a dependable hedge against inflation.
Unfortunately, the job of sifting through the hundreds of
outstanding REITs is a daunting one. Moreover, a single-
equity REIT is unlikely to provide the necessary
diversification across property types and regions. Individuals
could stumble badly by purchasing the wrong REIT. Now,
however, investors have a rapidly expanding group of real
estate mutual funds that are more than willing to do the job
for them. The funds cull through the available offerings and
put together a diversified portfolio of REITs, ensuring that a
wide variety of property types and regions are represented.
Moreover, investors have the ability to liquidate their fund
holdings whenever they wish. There are also low-expense
REIT index funds (listed in the Address Book), and I believe
these funds will continue to produce the best net returns for
investors.
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