Dear Nancy Woods,
I’m a bit confused about something that has happened recently in the market – specifically the REIT sector. My holding was doing really well, I was getting a good return and the price kept climbing. Then June, 2013, arrived and since then, my stock has fallen quite a bit. All my profit has gone. What happened and why?
There has not been a major catastrophic event in the real estate market to trigger the recent fall in prices. There has, however, been the indication that interest rates will be rising. The REIT sector is sensitive to changes in interest rates. The more interest rates rise, the less real estate income assets tend to make because they will have to pay higher borrowing costs.
The rise in stock prices before was not due to specific fundamental changes in the industry but investors looking for higher yields and income were buying real estate stocks to meet that. With the higher demand, higher prices followed. The share price of a stock is influenced by supply and demand. When investors were chasing stocks with higher-than-average yields, their demand pushed the prices up.
As an investor, you have to not look at only the yield, but the security of that company continuing to pay that yield and not cut the dividend. You also have to look at the other fundamentals of the company – the management, revenue, operating costs etc. A higher yield usually implies a higher level of risk. You need to ask yourself if the reward is worth the higher risk.
It can be a difficult decision as a shareholder to decide whether or not to hold onto an investment that is paying you a good return, when you have lost money on the share price. You could be turning your investment into a taxable income if the stock has dropped in value to an amount similar to what you are getting paid.
I hope you did not have a high portion of your portfolio in the one sector. Once again this is an example of the importance of diversification.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can send your questions to email@example.com as well.
Visit Nancy's website www.nancywoods.com for information on her upcoming seminar, "Is Your Portfolio Prepared for Rising Interest Rates?"