Portfolio Diversification Benefits: Common Stock vs. Real Estate Investment Trusts
Portfolio Diversification Benefits: Common Stock vs. Real Estate Investment Trusts
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When building a portfolio, it is important to understand the risk and reward potential of not only your individual holdings but also the asset classes in which you are investing. In this article, we will compare two investment alternatives: common stocks and real estate investment trusts (REITs).
Introduction
Introduction
Portfolio diversification is the process of dividing your investments between different asset classes, such that you aren't too heavily exposed to any one risk. Investment portfolios should typically be balanced among stocks, bonds, cash, and real estate investment trusts.
Diversification is the only free lunch
Diversification is not a free lunch. There are transaction costs and taxes to consider. It is prudent for investors to remain diversified in order to avoid being too exposed to any single investment.
What is diversification?
What is diversification?
Diversification is the act of spreading your investments around to minimize risk. In this case, the blog post discusses how diversifying one's portfolio between common stock and real estate investment trusts can reduce risk in investing. Investment types If a person is only investing in one type of asset, then that investor should be in the market for riskier assets. The article specifically mentions common stock and real estate investment trusts, but there are other options such as bonds, commodities and alternative investments (e.g. gold). The point is that investors need to be aware of how much risk they are taking on and how much exposure they have to each asset class.
What are common stocks?
What are common stocks?
Common stocks are shares in a company that allow the owner to share in the profits and losses of the company. The price of common stocks fluctuates based on how well the company is doing.
Common stocks have many benefits, including: the potential to earn a high return through capital gains, the possibility of receiving dividends, and voting rights.
What are preferred stocks?. Most common stock shares make up only 5-10% of total company value but preferred stock accounts for 80% of a company's value. Common stocks have voting rights and most preferred stock do not. However, preferred stocks pay dividends like common stocks. Preferred stocks are typically issued at $25 per share and sell for $50 per share. They are called preferred because they are higher in priority to common stock.
What are REITs?
What are REITs?
A Real Estate Investment Trust, or REIT, is a corporation that owns, holds, and manages investments in real estate properties. The properties are rented to tenants and the income generated is distributed to shareholders. Currently there is a boom in the REIT market because they trade at low valuations when compared with other asset classes like stocks. This makes them a great investment.
Showdown in the REIT Market
Showdown in the REIT Market
REITs seem to have a high probability of outperformance, but there is not much consensus on which one will perform best. One thing that I found interesting is that there are funds that invest in both real estate and its publicly listed stocks. This means that my research on REITs will be useful for investors looking for exposure to this market through their stock portfolio as well. The two major players are V NQ, which tracks the MSCI U.S. REIT Index, and VNQI, which tracks the S&P 500 index. But which of these funds should you invest in? I ran a backtest on these two stocks to see how they would have performed over time.
Conclusion
Conclusion
Even though stocks are more volatile than bonds, and stocks are riskier, the long-term average return of stocks is higher. Investing in stocks is a better option for those who have a long time horizon to invest or if they don't need their funds any time soon. Before investing, you should always research the businesses you're considering. And remember, no matter how safe a company looks, there's never a guarantee that it'll stay on solid footing. Make sure to talk with an investment adviser about your investing strategy to make sure you're doing it right.
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