April 28, 2022
How REITs Can Lead You to a Successful Investment Portfolio
At the beginning stages of investments, the stock market can seem like an intimidating territory. We are here to share the trusted investment strategy that serves as the best way to protect and grow your assets – portfolio diversification.
Diversification is a strategy that involves dispersing your money across a variety of funds, stocks, shares, and/or industry sectors. It is used to help investors expand their portfolio throughout different securities and asset classes. This strategy is often implemented during asset allocation, which involves determining how your portfolio is invested in each asset class.
Although this method is commonly known in the investment world, its impacts are easily overlooked. Diversification helps to balance out performance and minimize risks that investors might face depending on which way the economic pendulum is swaying.
There are many different approaches to diversifying your portfolio, but a great way to spread money throughout a large array of assets is by investing in real estate investment trusts (REITs). According to Nareit, commercial real estate is the third largest asset class in the U.S. investment market.
Investing in a REIT is an effective way for investors to diversify because of their strong dividends and long-term capital appreciation. REITs have a historically low-to-moderate correlation with other sectors of the market.
The dividends of REITs are substantial because they are required to distribute a minimum of 90% of their taxable income to shareholders annually. These dividends have a tendency to be stable because they are generated by the rent paid by tenants of the commercial properties owned by the particular REIT.
According to research conducted by Chatham Partners, 83 percent of financial advisors recommend REITs to clients. 80 percent of these advisors have increased their use of publicly-traded REITs in the last 1 to 3 years, while 92 percent of them anticipate that they will increase or continue their current use of REITs in the next 1 to 3 years. What is the main reason for this increased use? Portfolio diversification.
So who can benefit from investing in REITs? The answer is simple: Anyone! They are an ideal option for diversifiers who want to reduce risk and increase returns for their portfolio. Both retirees and those saving toward retirement may consider investing in them as well because of their ability to generate a steady stream of income, which individuals who have stopped working could be looking for.
If you are interested in investing in a REIT or diversifying your portfolio, we recommend doing your own research to find one that is right for you, as well as talking to your financial advisor to assess your options.
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