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With REITs posting strong returns this year, should investors overweight them?

In contrast to market sentiment and media hype, the answer is “no.” I advise investors to stick with a diversified, long-term investment strategy and avoid the urge to time the market, specific sectors or asset classes.

The case against overweighting REITs

In 2016, Standard & Poor’s announced its decision to add an eleventh sector to the S&P 500 Index – real estate. This change was made effective August 31, 2016. At the time, market pundits predicted massive inflows to REITs from investors seeking to capitalize on the sector’s addition to the market’s most popular U.S. equity index.

And indeed investors did exactly that – in the two-week period following real estate’s addition to the S&P 500 Index, retail and professional investors alike poured over $3 billion into REIT funds. Not to be outdone by Standard & Poor’s, Congress and the White House doubled down on real estate in late 2017 with the passage of the passage of the Tax Cuts and Jobs Act (TCJA), which granted preferential tax treatment to REIT dividends. The new tax law effectively capped taxes on REIT dividends at 29.5% (which were previously taxed as ordinary income at rates as high as 39.6%). In light of so much favorable news, the argument for overweighting REITs seemed pretty ironclad at the time. If ever investors could time a good entry point into an asset class, late 2016 and 2017 was it.