These days hardly anyone wants to talk about investments.  Whether it is your 401k plan, your IRA or your stock portfolio, it is simply too painful to discuss.  Perhaps you have taken to ignoring your account statements when they come in the mail every month.  You know it is going to be more bad news, so why ruin a perfectly good day. 

Occasionally on the radio or television you may catch the business news recap.   You listen to the reports on weakening consumer confidence and stagnant business spending and you know that means more negative numbers for your investments.   Lower account balances translates to a later retirement date.  You have a lot of lost ground to make up and you are not getting any younger. 

You know a few friends who finally bailed out of the market and moved all of their investments to cash.  Most made that move last fall because they simply could not bear to see their savings shrink any farther.  One coworker made that move two years ago and is feeling pretty smug.  She says she is not earning much in the way of interest, but at least she isn't losing sleep anymore, and her account balance is not going down.

You on the other hand had stayed in the market.  You were in it for the long haul.  That is what all of the successful investors were advising.  Be patient they said, markets go in cycles and the good times far outnumber the bad times.  The markets will start going up once this correction is over.  How many times did the experts report that the market bottom had arrived, only to see in go down more.
 

You finally gather the courage to look at your account statement.  You see that you are pretty well diversified.  You have invested in large and small companies.  You even own a bond fund and a fund that invests in foreign companies.  What else could you do?

Someone had suggested you should buy gold, silver or platinum.  That type of strategy did not appeal to you.  It seemed to be pretty extreme, but that sector of the economy had performed very well in the last 12 - 18 months.   Perhaps a little more research will help you decide if there is room in your portfolio for that type of investment.

As you think about other types of investments you recall a friend of yours from high school who had done pretty well with rental properties.  He never seemed to be worried about his retirement plan or the stock market.  He didn't care about Louis Rukeyser or George Soros, in fact he probably had never heard of them.

He had started out with a small duplex and as the years went by kept buying, selling and trading rental properties.  Initially he worked two jobs to support himself and his family and gradually he was able to devote himself full time to his properties.  You remember that your friend worked very hard at learning as much as he could about construction, real estate law and legal contracts.  He had worked very hard on his investments and they were beginning to pay off.

There were a few times when properties that he had purchased turned out to be real nightmares, and he had lost quite a bit of money on them. Usually it was because he had over extended himself and took on too big of a project.  However, he never gave up.  He always seemed to find a way to dig himself out and move on.  

As you recall your friend's struggles and successes with owning real estate you decide that it probably is not right for you.   You don't have access to enough cash to get you started.  Most of your accumulated wealth is tied up in either your retirement plan or your home, and you are not willing to put your home at risk for something you don't know a lot about.  Furthermore you don't have a lot of contacts you can call on for advice about owning real estate or renovating properties.  You know you are not particularly handy around the house and you would rather call a plumber than try to fix the leaky toilet on your own.  The idea of working on weekends to renovate houses does not appeal to you.

Most importantly though is that you don't believe you have the guts to make this work.  You have worked for the same employer for the last 15 years and you don't really see yourself as an entrepeneuer.   You know you are not much of a risk taker so you decide to stay away from buying and managing real estate.

However you do like the idea of using real estate to diversify your portfolio and you decide to find a way to include it in your portfolio without the hassles of owning property.  You hear about a type of investment called a Real Estate Investment Trust and decide to check it out.

Real Estate Investment Trusts (REIT's, rhymes with "beets") are companies that are organized to buy, develop, manage and sell real estate assets.  They can be small privately held companies with only a few investors or they can be large public firms with thousands of investors.  The bigger they are the easier it is to find them and the easier it is to buy and sell shares of the company.  Many of them trade their ownership shares publicly either in the form of mutual funds or as individual securities.  

The publicly traded companies make it real easy to add real estate type investments to a portfolio.  In a matter of moments you can call a stockbroker or mutual fund company and tell them how many shares you want to buy and they tell you how much to write the check for.  Likewise if you decide later on you need to sell some of your shares, you call your broker and tell him how many shares you want to sell.  Imagine trying to do that if you owned a bunch of rental property in Portland.  If you needed cash and had to sell property to get it, you might find yourself waiting weeks or even months to get the cash you needed.

When it comes to tax matters REITs are a lot simpler to deal with than individual properties.  The IRS labels them as pass-through entities.  By meeting a long list of rules and standards, REITS are able to distribute the majority of income cash flows to investors without having to pay taxes at the corporate level.  This avoids the potential of having to pay taxes once at the company level and also at the shareholder level.
 
As you continue your research you learn that REIT's often own properties in different states.  Sometimes they own both residential and corporate property which reduces the likelihood of your investment going south because of problems with local economies or because of overbuilding of office space.  

As you ponder these advantages you remember when your friend once had a lot of vacancies with his properties because of a high unemployment rate.  People were losing jobs and moving to other areas and he had a tough time making his payments on his properties.  

The more you read the better you like the idea of REIT's.  You are especially comforted when your research shows that REIT's tend to move in the opposite direction of the stock market and they don't seem to bounce around as much as some of your stocks have done.  

You decide that including REIT's will give you more diversification.  You make a promise to yourself to buy a few hundred shares the very next day.   

Maybe this is a conversation you have already had with yourself.  If not, give it some thought.  REIT's may be just what you need to bring some positive returns and stability to your portfolio.
 
 

© 2003 Mark Neil