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Investment portfolio diversification using REITs

By November 30, 2023No Comments

Real Estate Investment Trusts (REITs) are considered to be an attractive investment strategy as they not only offer new investors an entry to invest in real estate, but also enables seasoned investors the opportunity to diversify their existing portfolios.  

Unlike traditional real estate, REITs are highly liquid as they are required to distribute a large percentage of their income to their shareholders with high-yield dividends often paid on a monthly or quarterly basis. This highly liquid strategy allows investors to buy and sell shares with ease. In addition, REITs are a viable option for investors who do not want to manage the physical assets themselves. 

However, just as with any investment, many factors are to be considered before committing capital. As there are various types of REITs, before making a decision on which REIT to invest in, consider your own risk tolerance, investment strategy and time horizon. Analyse factors such as interest rates, income generation, market conditions, sector variability and global factors. Furthermore, as you have no control over the REIT’s investments, it’s important that you thoroughly research the REIT’s management team, investment strategy and past performance. Gain a strong understanding of the market and jurisdiction regulations to ensure all of the necessary criteria have been met. Working with a reputable REIT will strongly contribute to the overall success. 

To further portfolio diversification, REIT Exchange Traded Funds (ETFs) are also considered to be an attractive option as they allow investors to invest in a basket of REITs instead of individual REITs, furthering the exposure. 

Historically, REITs have outperformed traditional asset classes, ‘’Over a 25 year period, the index returned 9.05% compared to 7.97% for the S&P 500 and 7.41% for the Russell 2000. Historically, investors looking for yield have done better investing in real estate than fixed income, the traditional asset class for this purpose. A carefully constructed portfolio should consider both.’’