The Ignorant Investor

Okay, it's only a guess. Over the past three and a half years Vanguard's REIT index fund (VGSIX) is up about 250% percent, with a three year average of 25% per year. That rivals the growth rate of the S&P 500 during the 1996-2000 period of "irrational exuberance."

The yields tell the whole story. You can see the effect of the market bidding up the value of these securities in the yields. I remember a few years back when a REIT might yield 9%. Now VGSIX yields about 4.28%. That's less than you can get in a nearly risk free money market fund. And VGSIX's P/E ratio is running around 48, a figure nearly as high as Google's.

These are shopping malls and office buildings we're talking about, not a whole new industry like online advertising that Wall Street may have difficulty in evaluating. It's well known that the supply of commercial and residential properties are subject to occasional cycles of boom and bust. Yet instead of caution taking hold, year to date VGSIX is up over 13%, a return far beyond any asset class but gold.

These just don't seem like rational valuations. REITs are terrific for diversifying a portfolio, and the toughest task in investing is watching a security you see as overvalued continue to score as you sit on the sidelines. But what can you do except wait for the inevitable reversion to the mean? Nothing goes up fast forever. And you don't want to be left holding the bag when it starts dropping.