Stock portfolios often include a mix of stocks, bonds, precious metals and real estate. The more diverse the portfolio, the less a portfolio is vulnerable to market trends. But a lot of investors will choose tech stocks as a major portion of their portfolio, such as Amazon (AMZN, Financial), Facebook (FB, Financial) or Alphabet (GOOGL, Financial).
Real estate is a great way to diversify an investor’s portfolio.
You can opt to invest in physical real estate, buying properties, collecting rent or flipping properties. Business real estate will require even more diligence and greater risks, as you’ll be responsible for every part of the process, including having to compare your commercial mortgage options, conducting market research and filling vacancies.
Real estate, infrastructure and REITs offer the ability to diversify a portfolio in a hands-off manner.
The census on how much of a portfolio real estate makes up is from as low as 5% to as high as 25%, depending on the source. Why? Real estate is closely tied to economic data and factors, so it will fall sharply during recessions and can be more volatile than other investment options.
Interest rates for a 30-year fixed mortgage just rose to an average of 4.72% for the week ended Sept. 27, and this marks the highest rate for mortgages since 2011. A rise in interest rates and positive housing data caused volatility in the market, as REITs often fall on higher interest rates and developer stocks rise on positive housing news.
REITs versus bank stocks or infrastructure stocks are a great option for diversification because the REIT pools the funds of investor money, purchasing or financing properties in the process. REITs are attractive because a portfolio can include a mix of REITs, including those that specialize in hospitals, hotels, apartments or shopping centers.
The diversification of an REIT also provides yields to investors, so investors will be able to receive income from the REIT.
Ellington Residential Mortgage REIT (EARN, Financial) provides a 13.17% dividend, with an annual dividend of $1.48 based on a $11.24 closing price.
REITs provide an income-producing asset that allows for funds to be flipped into additional investments, pushing a portfolio’s value higher in the process.
Real estate developer stocks rise on better housing data, so a portfolio should also include real estate developers, both residential and commercial, along with stocks related to mortgages. A mix of real estate-related stocks will pad a portfolio against market shifts and economic data releases.
Disclosure: The author has no stake in the listed equities.
