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"What are some alternative investments to stocks I can add to my portfolio?” Round 1: REITs

This week, we are going to be looking at alternative investments to stocks, to help you add diversification to your investment portfolio. 

Today’s question is:

“What are some alternative investments to stocks I can add to my portfolio?”

 

There are times when holdings stocks can be difficult. It’s never easy to see a 10% or 20% decline in your portfolio, but its important not to let a few bad days or weeks force you into an investment that will have much lower returns in the future.

As we have discussed before, bonds are a great investment to help diversify risk away from stocks, but their returns have historically been much lower, so investing all your money in bonds hardly seems like a good idea either.

Today I want to look at an asset class called REITS R E I T, Real estate investment trusts. These are special kinds of companies that generate most of their income through real estate, and they are required to pass 90% of their income back to investors in the form of dividends.

Best yet, they have outperformed stocks over the last 40 years. Since 1972, REITS have averaged an 11.8% annual return, compared to 10.6% for stocks.


reits performance.png

And they tend to behave differently than stocks, going up at different times and also going down at different times. Over the last month, the S&P 500 is down nearly 10%, while REITs are down just 0.1%. Over the last week, they are actually up 2 and a half percent while the market is down nearly 3%.

But there, are some important things to know. First, dividends from REITs are taxed as ordinary income, their dividends do not qualify for a lower tax rate like many other stocks’ dividends. So they are likely a good candidate for investments that should go into a tax sheltered account such as your IRA, ROTH IRA or 401(k).

Lastly, REITs have historically been more volatile than stocks. So although they may not fall at the same times as your other stocks, you will still see big moves in their prices.

Matt Hylland