Diversification Benefits of REITs

Portfolio diversification is the process of combining individual investments whose returns are not highly correlated, meaning that their returns do not necessarily move in tandem over time. When some investments are increasing in value, other investments may be going down, thereby reducing the portfolio's overall volatility, or risk.

Over the last 30 years the correlation of REIT returns to the returns of other stocks and bonds has declined significantly. REITs provide a way to realize the economic benefits of real estate, obtain stable, consistent income and long-term growth while increasing portfolio diversification beyond what other common stocks and fixed income securities can offer by themselves.

Now more than ever, investors have realized the importance of diversifying their investment portfolios. From conservative fixed income investors seeking to increase their income while protecting themselves from future inflation to stock and bond investors who seek to diversify away the volatility of a concentrated portfolio, REITs offer investors a new way to accomplish an age-old investment goal: "How can I increase my return without taking on more overall risk?"

NAREIT asked Ibbotson Associates - a leading authority on asset allocation - to examine the historical investment performance of REITs. Ibbotson found that:

• REITs offer an attractive risk/reward tradeoff
• The correlation of REIT returns with other asset classes has declined over the past 30 years
• REITs may boost return or reduce risk when added to a diversified portfolio
• REITs are worth investigating as an addition to many types of portfolios.

"The goal of diversification is to lower the risk of a portfolio for a given level of return. Because of their declining correlations with other types of investments, REITs offer a significant source of portfolio diversification." Michael C. Henkel, President, Ibbotson Associates

Please note: All data is derived from, and apply only to, publicly traded REITs