Modern portfolio theory holds that diversification is key to minimizing overall risk. In other words, investors should populate their portfolios with assets that yield returns with sufficiently different attributes from their other investments, i.e. create a portfolio of assets that behave differently across market conditions. Doing so requires investors to seek out different types of assets with low correlation—a measure of the extent to which returns from different investments move together over time.
Analysts and portfolio managers tend to consider investments with correlations of approximately 60 percent or less to provide diversification. Likewise, REITs compare favorably to other investment vehicles in terms of “beta,” a common measure of volatility that reflects the movement of an asset class in relation to the broader market.
The financial community has started to recognize that within the total real estate portfolio, REITs offer a strong complement to direct investment in real estate. By taking advantage of both public and private investment in real estate, investors can take advantage of a broad continuum of investment options for their real estate allocations.
