Real Estate Investment Trusts (REIT) is one additional way to invest in your portfolio. REIT’s are a pool of money from investors that invest mainly in real estate. There are really three types of REIT investments. Equity REIT’s invest in everything physical about real estate including apartment buildings, shopping centers, office buildings and industrial plants. Mortgage REIT’s invest in mortgages and make money from interest payments but not appreciation. Hybrid REIT’s are a combination of both.

REIT’s get a tax exemption but by doing so are required by law to return to the investors 90% of its taxable income. Thus investments in REIT can result in taxable income. Some individuals who invest in REIT’s choose to use their non-taxable funds for this reason.

There is some upside to investing REIT’s. One is that you do not need large capital holdings to invest in real estate. Second is that you do not have to deal with all the issues that come from being a landlord. Third REIT’s have shown to have a negative correlation to stocks. Therefore owing REIT’s will serve to diversify your investments. Fourth buying and selling REIT’s is like buying and selling stocks so it is easy to move in and out of an investment, unlike the actual owning of property You can do stock market trading in REIT’s..

The downside to investing in REIT’s is that you are not actually benefiting as much from the appreciation of property but do bear a good part of the risk since you have placed your investment in real estate. If the real estate market goes down, your investment goes down also. Another is that you will have taxable income every quarter in the form of dividends whether your tax situation can handle it or not.

A professional investor designing a balanced risk investment portfolio may consider investing in REIT’s. However, they would not consider giving up the potential large returns from stock investments to invest in REIT’s. They may move a small percentage of their portfolio to gain the diversification but it would not be much, say 5%. This is because REIT’s are exposed to the risk of price volatility by global economic factors and crises in other electronic markets and countries. Direct investments in real estate does not carry that risk since the price of the investment is not being determined by other factors than the real estate market.

In the latter end of 2009, the stock market and the economy began to improve. Unemployment was improving and the economy begin to grow. However, the real estate market is still down, so moving even a small percentage of your investments to REIT’s at this time does not seem to make a lot of sense. Real estate may come back in 2010 though, so jumping in now may be jumping in ahead of the game. That is a hard call to make.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Achieving the higher returns from investing in the stock market carries with it also the higher risk that something will happen to the principle invested. Concerns that the stock market will dip or that a particular company invested in will go bankrupt or have a bad news report is what is worrisome to most investors. One way to use risk management on reducing this risk is to invest in several different mutual funds.

There are constraints that need to be taken when deciding which mutual funds to invest in. One of these is the cost of the mutual fund. Mutual funds carry with them what is called load fees or exit fees. This is so the expenses of the mutual fund can be handled. An investor needs to review the fees and ensure they are getting the most for their money.

Another thing an investor needs to look at is what stocks the mutual fund is invested in. Often times an investor will invest in 2 – 3 mutual funds and have not really diversified as well as they could due to the fact that the mutual funds they have selected have invested in the same stocks or similar stocks. This results in over diversification. A review of the top holdings is necessary before making a purchase decision.

A well diversified portfolio includes asset classes that are not highly correlated and thus are considered to be complimentary. By spreading your investments over several different funds that have low correlation to each other, the price fluctuations are greatly reduced. This is due to the fact that not all industries move up and down at the same time. Choosing industries that move counter to each other will greatly reduce your risk.

Stock correlations range between +1.0 and -1.0. If an evaluation of two stock funds shows they have a correlation of .93, if you invest in these two funds, you are in essence investing in just one fund since they tend to move together. A better scenario would be to invest in funds that have a correlation of -.25. This would better diversify your portfolio.

The determination of correlation uses a regression analysis which in essence plots the returns and risk for each fund on a graph and determines how they move in relation to each other. The math behind the analysis is a little complicated. There are correlation calculators available on the internet that will simplify this math. By plugging in the funds, you can find out how they correlate to each other.

Another method to use to reduce your risk is to invest globally. A study completed by the Indiana University of Pennsylvania as reported in the Encyclopedia Britannica found that “portfolios with only forty stocks spread among major domestic and international markets reduce risk of domestic portfolios by more than 50 percent”. In this study the European markets were found to be more correlated with the domestic markets while the Asian markets were less correlated and the emerging markets were the least correlated. Thus a portfolio which invests in funds that cover domestic as well as foreign and emerging markets will reduce your risk.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.