Most investors understand the importance of diversification, which is investing in a variety of asset classes to help ensure that when one is performing poorly, another is performing well. And one way to diversify is to add real estate to your portfolio. But doing so isn’t easy.
That is why some investors interested in real estate choose real estate investment trusts (REITs), which are securities that (a) invest in income-producing real estate or (b) make loans to businesses in the real estate industry. Investors in REITs earn income derived from rent; they can also participate in the profits from the sale of properties in the REIT portfolio. REITs often trade on major stock exchanges, so they are liquid.
In terms of diversification, many investors consider REITs for their historically low correlation with other asset classes. That is, they tend to perform differently from other investments, including equities, fixed income and cash. For example, in calendar year 2019, the MSCI U.S. REIT Index returned 25.84%. By comparison, the S&P 500 Index returned 30.43%, and the Bloomberg Barclays U.S. Aggregate Bond Index returned 8.72%.
Of course, REITs are not without risks and can be volatile. In the last calendar year (2020), for example, the MSCI U.S. REIT Index was down almost 20% (as of September 30, 2020) due to challenges presented by COVID-19.
If you are considering investing in REITs, then please reach out to us so you can get the best information that will help you determine if they make sense for your portfolio.