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.

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President Lincoln once said that if he had eight hours to chop down a tree, he would spend seven of it sharpening his saw.  With stock market trading, your diversification allocation is an important strategy to make your investments successful.  The question then is concerning what asset classes to choose, what percentage of your investment goes in each class and what sectors and stocks do you put your investments in for each asset class.

This is probably the most important decision you will make as far as your investment strategy.  Therefore, as President Lincoln advised, do not short your time with this question.  Spend some time looking at the asset classes and their expected return and the standard deviation.  Use an asset allocation calculator which is available online to plot your ideas and see how they fit together.  One example of a calculator can be found at http://www.dinkytown.net/java/AssetAllocator.html.  It allows for input on your current situation and gives a possible start on an allocation formula.  Another site that helps determine asset correlation that is really good is at  http://www.assetcorrelation.com/user/enter_custom_port.

Stock diversification is important because if you have all your investments in like kind asset classes, if the asset class or particular sectors within that asset class has a bad period of time, your entire investment has a bad period of time.  One definition I cam across said that  diversification is the process of spreading your money among different investments to reduce risk.  By picking the right group of investments, you may be able to limit your losses or enhance your gains.

That is certainly the rub.  What group of investments do you select.  After checking their credentials, a financial planner or stock advisor may be a good person to check with.  They can give you advice as to how to begin.  You can plug their ideas in the asset allocation calculator and check if it fits your strategy.  Your strategy will certainly be finessed over a period of time as you test your theories.  This is not bad.  As stated in another area, you can test your theories with play investment sites before you enact it for real with your money.

One analysis I read about suggested putting a portion of your investment in commodities and real estate investment trusts (REIT’s).  The argument is that even though these asset classes are volatile, they will go a long way toward diversifying your portfolio.  Another book I read said that if you invest in REIT’s, than move a portion of your small cap funds to that asset class.  That is an idea you would need to look at and see if it fits your strategy.  Certainly, commodities are a little riskier and volatile.  When the market is down, people move toward them.  However if the dollar strengthens and the market improves, these suffer.

The advice then, is to take your time initially.  Sharpen your saw and determine the correct strategy and mix for you.  Then stick with the system.  You did your homework up front, then trust your system.