Investors in real estate investment trusts (REITs) have been some of the hardest hit in the market meltdown. While the thought of selling your REITs might feel good at the moment, this approach could cost you dearly in the long term. REIT investors should try to avoid these common mistakes:
1. Selling at the bottom. When the market drops substantially, as it did in early 2020, you want to evaluate whether you are selling only because the REIT has gone down or because you think it’s going to fall further due to fundamentals.
2. Not analyzing a REIT carefully. Whatever you are thinking about doing with a REIT — buying, selling or standing pat — it’s important to analyze them and the industry carefully. REITs operate in many different sectors — health care, lodging, apartments, retail and data centers, to name a few. The dynamics of each of these sectors is tremendously different, so you can’t take a one-size-fits-all approach.
3. Letting fear keep you from buying good REITs. If you have analyzed the company and the long-term future looks good, it could be a mistake not to buy more, especially if you are receiving a significant discount to what you think the REIT will be worth in the future.
So it’s important not to let fear scare you away from a good bargain.
That’s not to say that every discounted REIT is a bargain. And even good companies can become cheaper as new information emerges or investors become more pessimistic. That’s one reason many experts recommend using dollar cost averaging to buy into stocks. Using this approach, you can spread your buying apart to average into a stock.
4. Only concentrating positions, not diversifying. If you are looking to buy REITs in the downturn, it can be a mistake to focus only on the ones you own. Instead, it could be an opportunity to buy some of the high-performing stocks that simply looked too expensive before. In this way, you can take advantage of the power of diversification, actually adding more high-quality companies to your portfolio while they’re relatively cheaper.
5. Assuming things will return to normal quickly. While the market has bounced off its lows relatively quickly, it could be a mistake to think that the real economy will bounce back as fast. Many people are expected to remain out of work even when the coronavirus is neutralized as a threat, and numerous businesses won’t come back at all. So this environment will make it difficult for even great companies to snap back quickly.