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1 Smart Way to Diversify Your Portfolio

By Matthew Frankel, CFP® - Updated Apr 29, 2021 at 10:28AM

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Here's why all stock investors should consider making this move.

Many investors don't think of real estate investment trusts, or REITs, as a different asset class from stocks, even though they have some very different characteristics. And others simply feel that REITs are "boring" investment vehicles. In this Fool Live video clip, recorded on April 20, contributor Matt Frankel, CFP, asks Abby McCarthy, the senior VP of investment affairs for the National Association of REITs (Nareit), why REITs can be an important and lucrative way for all investors to add diversity to their portfolios. 

Matt Frankel: So, you said REITs are a really nice way to add diversification to our portfolio, right? So is it just a different kind of asset class? Are they less volatile than maybe some of the stocks our investors are looking at? Can you expand on the diversification principle and how real estate performs over time?

Abby McCarthy: Absolutely. Yes. Real estate, really, if you're looking at the entire investment market, which commercial real estate makes up about 14%, and when I'm saying the entire investment market, I'm talking about equities, bonds, cash, and commercial real estate, those are really seen as the fundamental asset classes of the investment market. Obviously, to invest wisely, you have to own the investment market. What makes commercial real estate stand alone as its own fundamental asset class is that it really has its own real estate cycle, which is different from the business cycle, which makes then the overall performance and returns in the industry different than that of equities or bonds. Now, REITs, actually, are a wonderful representation and an easy and low-cost way of accessing the commercial real estate asset class for investors. As I mentioned before, I think the studies that we have shown show that allocation to be somewhere between 5% and 15%, which definitely matches up with the overall exposure, 14% of the commercial real estate asset class has in the overall investment market. Obviously, REITs are that easy liquid way of accessing that. So commercial real estate has a role in every portfolio. REITs are the easy way of accessing the real estate asset class through that.

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