Selling Your REIT – A Framework to Guide You in Making the Right Decision

When it comes to investing, our goal is to maximize our total returns. We want our stocks to provide us with decent dividend cash flow and capital appreciation. But not all stocks live up to...

When it comes to investing, our goal is to maximize our total returns. We want our stocks to provide us with decent dividend cash flow and capital appreciation. But not all stocks live up to our expectations, especially when it comes to Real Estate Investment Trusts (REITs). Often, we find ourselves holding onto a losing REIT, hoping that one day it will turn around and break even. This can leave us feeling unsure about whether to sell or wait for it to recover. Today, we will explore a framework to help you make the decision on whether to sell your REITs.

Reflecting Back to Your Original Game Plan

The first step in making the right decision is to understand your investment strategy. Your game plan will determine the type of REITs available to you and the conditions for buying, evaluating, and selling. If you don't have a clear game plan, it's time to create one. Without it, confusion sets in when you start losing money. Your game plan will shape the wealth machine you create with REITs. For example, you might have a low maintenance, fixed deposit wealth machine with specific criteria for buying and holding REITs like Ascendas REIT, Frasers logistics and industrial trust, and Mapletree commercial trust. On the other hand, you might have a speculative wealth machine that focuses on REITs in special situations, such as Ascendas India or Sabana. Each wealth machine has its own rules, and it's essential to have a clear game plan to create sustainable wealth with REITs.

Understanding Which Part of the Investing Life Cycle You Are In

Investing in REITs follows an investing life cycle, which includes prospecting, buying, reviewing, and selling. During the review stage, you evaluate whether to buy more or sell a REIT. Reviewing your REITs is an ongoing process and occurs during quarterly results, significant corporate announcements, and key economic news related to the REIT. The objective of the review is to determine if any new information changes the original picture of the REIT. Are the reasons you invested in the REIT still valid? If the picture changes significantly, it might be time to consider selling or buying more.

How Often Do You Need to Carry Out a Review of the REIT?

The frequency of your review depends on your game plan and the nature of your REITs. Some REITs require more frequent reviews, especially speculative ones, while others can be reviewed less often. However, various triggers will prompt a review, such as quarterly results, corporate announcements, and economic news related to the REIT. The objective of the review is to determine if any new information changes the original picture of the REIT and if it aligns with your game plan.

What Should You Think About During the Review of Your REIT?

During the review, you should consider the same factors you evaluated when you first prospect the REIT. Key metrics to review include the competency and integrity of the REIT's managers, the state of the jobs, business, and economy, and the valuation of the REIT. Competency and integrity of the managers are crucial because they are responsible for making decisions that affect the performance of the REIT. Evaluate whether the decisions they make are of high quality and in line with the operating environment. Monitoring the jobs, business, and economy is essential to understand how they impact the REIT's performance. Finally, analyze the valuation of the REIT to determine if it's overvalued, undervalued, or fairly valued. This will influence your decision on whether to add to or sell the REIT.

Reflecting Back to the Sell Condition When You Prospect to Buy the REIT

When you prospect a REIT, you should have a clear sell condition in mind. This condition is part of your game plan and determines when it's time to sell. For example, if the REIT's financials or corporate actions are not within expectations, it might be time to sell. Different game plans will have different sell conditions, and it's important to stick to them.

Avoid the Sunk Cost Fallacy

One common mistake investors make is holding onto a losing REIT because they don't want to lose money on their investment. This is known as the sunk cost fallacy. Instead of focusing on the money already invested, ask yourself, "If I were starting from scratch, would I buy this REIT again?" This mindset allows you to evaluate the REIT objectively and make a forward-looking decision. If the REIT's nature has changed for the worse, it might be time to sell. Don't be afraid to redeploy your capital into a better opportunity.

Don't Fall in Love with Your REIT. Instead...

It's important not to fall in love with your REIT. While it's good to admire the capabilities of the managers and appreciate a portfolio of assets, it's equally important to search for potential negatives. No REIT is perfect, and it's crucial to maintain a balanced view. Avoid holding too many REITs, especially if you can't devote enough time to reviewing and managing them effectively. Keep your portfolio lean and nimble, and invest in REITs that align with your game plan and have a clear picture of their potential returns and risks.

Get Competent in Investing in REITs

Lastly, keep building your competence in investing in REITs. Reviewing and evaluating REITs requires knowledge and understanding of various aspects and metrics. Take the time to learn and expand your knowledge to make informed decisions.

In summary, whether to sell or hold a REIT depends on your game plan and the evaluation criteria you set. Regularly review your REITs based on their performance, the state of the jobs, business, and economy, and their valuation. Don't let the sunk cost fallacy trap you into holding onto a losing REIT. Instead, be forward-looking and make decisions that align with your game plan. Finally, continually work on improving your competence in investing in REITs to ensure sustainable returns over time.

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