REITs: Don't Invest Unless You Understand

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Includes: EFA, NEWC.PK
by: Roger Nusbaum

roger nusbaumRoger Nusbaum submits: The first time I ever mentioned my fear of mortgage REITs was in December 2004, and I have reiterated the same sentiment several times since. The big driver for my dislike of these stocks is very simple: I view them as being very complicated businesses, even the healthy ones.

Complicated as it pertains to selling money and managing interest rates makes for volatile stocks as has been the history with these. FYI, on February 8 I disclosed selling New Century Financial Corp. (NEW) for one client who gave us a mandate to buy 100 shares last year.

One more CNBC nitpick. This morning Mark Haines asked someone (I was driving to Phoenix at the time so don't know who it was) what good foreign investing is because the foreign markets are all down more than the U.S. market.

This is an example of the wrong question being asked. So far this is a short-term event with some degree of panic. Managing for the occasional one-month panic is not what long-term investors should do.

Over longer periods some foreign markets offer protection but some don't. In a recent article for TSCM I bagged on iShares EAFE (NYSEARCA:EFA) for not offering much protection during the tech wreck aftermath. In a two year period studied, the SPX was down about 30% and so was EFA, after taking almost the identical path down. During that same period Australia was only down 10% and so did offer some protection.

The conclusion here is that the broader you go the less you get.