The Role of Real Estate in a Portfolio
Real estate offers significant benefits to a diversified investment portfolio. These include:
- A low correlation with the returns on investments in stocks and bonds, which improves the overall diversification of a portfolio.
- Income enhancements from property rental offer a stable revenue stream and reduce return volatility.
- REITs have a higher Sharpe ratio (risk adjusted return) than stocks or bonds.
- A low correlation between real estate investments (geographic and sector diversification within real estate).
Although real estate improves diversification relative to a portfolio of stocks and bonds, it has demonstrated less benefit when added to a portfolio that also includes hedge funds or commodities. The diversification benefits may be redundant to those of other alternative asset classes.
Investing in real estate also poses special due-diligence concerns, including the valuation method, financing opportunities, legal issues such as zoning and title checks, and taxes.
For more information, see all articles on: Alternative Assets, Institutional Investing, Investing in Real Estate, Investment Returns, Portfolio Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
