REITs and Diversification

Investors who diversify their portfolios have a better chance of ending up with more savings for their retirement and other financial goals. In part this is because diversification reduces the risk of volatility and losses from any one security or asset class. In other words, don’t put all your eggs in one basket.

Real estate is considered a distinct and essential asset class that every investor should own as part of a well-diversified portfolio. Decades of portfolio research show REITs have a low-to-moderate correlation with other sectors of the stock market, as well as bonds and other assets.

Real estate is an essential asset class that every investor should own as part of a well-diversified portfolio. Stock exchange traded REITs give investors an efficient way to diversify their investments to reduce risk and increase long-term returns.

A key benefit of diversification is the potential to increase long-term returns without taking on additional risk. The chart below illustrates how taking a portfolio made up of 60% stocks and 40% bonds and reallocating 10% to listed U.S. REITs would have improved annual returns by 0.25% per year on average over the 25 years from 1990 to 2014, while reducing portfolio volatility by 0.21% per year. For a portfolio with a beginning value of $10,000, that would have added $4,369 of additional gains while exposing the investor to less portfolio risk.

Stock exchange traded equity REITs have proven to be the best sector of the stock market for diversification. This is because REITs historically have not moved closely in tandem with other sectors of the broader stock market, particularly for investors whose time horizons are measured in years rather than months. 


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