A Financial Revolution 


January 17, 2006
REITs Offer Diversification Benefits
Ibbotson and Associates recently published a study comparing two portfolios – one with 20% invested in Real Estate Investment Trusts (REITs) and one with no REITS. These are typically funds or individual stocks of companies that lease apartment or commercial office space. The study found that since 1972, the account with 20% invested in REITs increased annual returns by 0.7% compared to a portfolio with no REITS (11.6% vs. 10.9%.)

While the 0.7% may not be much (less than a typical actively-managed mutual fund charges), the more important finding is that REITs have a low correlation to stocks, especially small stocks. That means if you plotted the share price of REITs and small stocks you wouldn’t see patterns or relationships between the two.

REIT stocks and funds had an amazing few years, but things cooled off last year as we started to see the air coming out of the housing bubble. I wouldn’t move much money into REITs right now, and certainly not 20% of a portfolio, but this is one strategy to remember when it’s time to rebalance the portfolio.


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