The Diversification Factor
Ideally, an investment portfolio straddles four fundamental asset categories: cash, stocks, bonds and real estate, Case says. Publicly listed REITs offer a viable avenue for nearly every investor to hold commercial real estate.

Beyond the ability to trade into commercial real estate through the public markets, REITs diversify a retirement portfolio, which, in turn, can reduce its volatility, Case says. “That’s particularly important to people who are in or near retirement,” he says. “It’s very stressful to see the balance of your total portfolio go down.”

Schneider echoes those thoughts, noting that REITs run counter to the stock market. “REITs are total return investment vehicles that offer diversification benefits that may improve the risk and return profile of a traditional stock and bond portfolio,” Schneider says. “REITs are a good way of getting an equity-like return while diversifying away from traditional equities and bonds. That is what makes them attractive for people in retirement or any other stage of life.”

Simon Moore, the chief investment officer at FutureAdvisor, which manages clients’ retirement portfolios digitally, says REITs act as a “reasonable hedge” against inflation given the ventures are tied to real property. “We don’t necessarily see inflation spiking anytime soon,” he says, “but given we are managing retirement portfolios on a multi-decade view, it’s risky to discount the scenario.”

When piecing together an investment portfolio, Schneider places about 10% of a client’s total equity exposure in REITs. In a typical 60/40 stock-bond mix, he carves out 10% of the 60% stock portion for investments in globally diversified REITs through either REIT funds or ETFs. “Global REITs are an even better diversification tool,” he says, “since not only are you investing in real estate, which is a different asset class than stocks and bonds, but you also introduce real estate from different economies around the world.”

When picking a REIT fund or ETF, Schneider leans toward low-cost, well-diversified, passively managed index funds. He prefers vehicles containing all major property sectors.

Schneider further points out that since REIT income is taxed at ordinary income rates, not dividend rates, they are best owned inside of a qualified retirement plan or other retirement account. He prefers equity REITs over mortgage REITs. Though mortgage REITs can be enticing to a retiree or near-retiree because of their high yields, Schneider cautions they are more of an interest rate play than a true real estate investment. “How those will perform in a rising interest rate environment or in an environment where the yield curve flattens is questionable,” he says.

 

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