Weathering market volatility calls for diversified portfolio.In light of the recent pullback Pullback A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum. in the equity markets as a reaction to the current lending environment and sub-prime woes, investors have been reminded of just how sensitive and emotional the stock market can be. While no one can predict which way the markets will react, one thing for certain is that market volatility will always remain a constant in the stock market. Bearing a degree of risk in your portfolio is a proven investment strategy. However, successful investors will also tell you that allocating a percentage of the investments to less volatile assets is the key to weathering wild flucuations in the stock market. A truly disciplined approach to building a diversified portfolio should include an allocation of "hard assets." Quite simply, hard assets are defined as a class of investments that hold an intrinsic value Intrinsic Value 1. The value of a company or an asset based on an underlying perception of the value. 2. For call options, this is the difference between the underlying stock's price and the strike price. and are inherently non-financial. Generally, gold and precious metals Precious Metals Valuable metals such as gold, iridium, palladium, platinum, and silver. Notes: Investing in precious metals can be done either by purchasing the physical asset, or by purchasing futures contracts for the particular metal. , petroleum and coal products, timber and paper products, and real estate fall into this category. By far the most easily accessible of these investments is real estate. Large institutional investors Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. such as pension funds and insurance companies have made significant allocations to real estate investments for many years. The introduction of non-traded, hard asset investments into the typical equity & debt-base portfolio is profound. An investor can realize lower portfolio volatility (beta) and increased yields (alpha) with non-traded real estate investment allocations between 5-20% of their total portfolio. A recent study by Wells Real Estate funds found that between 1978 and 2006 investment portfolios that included a 10-20% allocation in real estate historically outperformed portfolios with a traditional mix of stocks and bonds. Moreover, portfolios including a 10% real estate allocation reduced the portfolio's calculated risk (standard deviation In statistics, the average amount a number varies from the average number in a series of numbers. (statistics) standard deviation - (SD) A measure of the range of values in a set of numbers. ) from 10.08 to 9.65) Recent history points to the advantages of including real estate in an investment portfolio. The NCREIF NCREIF National Council of Real Estate Investment Fiduciaries Property Index (NPI NPI National Provider Identifier, see there ) reflects returns on investmentgrade, income-producing properties. Total average annual returns for the NPI over the past 3 and 5 years were 17.05% and 13.38%, respectively. But what about stocks during the recent bull run? Surely they outperformed non-traded real estate. Not so fast. The annual returns for the S&P 500 were 11% over the past three years and 12% over the past five? So how does one go about including real estate in their portfolio? An easy way for investors to round out their holdhags in this manner is to add interests in professionally managed, non-traded public REITs or real estate limited partnerships and LLCs. A major benefit to REIT REIT See: Real Estate Investment Trust REIT See real estate investment trust (REIT). ownership is that most of these investments are already somewhat diversified by geography and asset class (offices, apartments, retail, and industrial). In addition, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. , a company must pay 90% of its taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. to shareholders every year to qualify as a REIT. It must also invest at least 75% of its total assets in real estate and generate 75% or more of its gross income from investments in or mortgages on real property. Another type of real estate investment gaining populaxity is Tenant-In-Common investments, more commonly known as TICs. A TIC is a form of holding title to real property. It allows an investor to purchase an undivided UNDIVIDED. That which is held by the same title by two or more persons, whether their rights are equal, as to value or quantity, or unequal. 2. Tenants in common, joint-tenants, and partners, hold an undivided right in their respective properties, until fractional interest in a single property. In addition, it has become the preferred investment vehicle for real property investors who wish to defer capital gains via a 1031 exchange and own real property without the management headaches. Because TIC opportunities are often "packaged" with management and financing in place, TIC investments offer greater efficiencies in owning and operating real estate. While the headlines in the media portray the turbulence of the stock market and housing crises daily, investments in hard assets such as commercial real estate have proven to be an important component of a successfully diversified portfolio. By investing in a REIT or TIC, investors can easily balance their investment holdings and create a hedge against market volatility. 1-Wells Real Eatate Funds--Diversification May Reduce Risk 2-NCRE1F (National Council of Real Estate Investment Fiduciaries) website--"Historical National NP1 Returns." http://www.ncreifcom/indices/npi.phtml?type=national BY JOSH SLAYBAUGH, PRESIDENT, TRADE UP 1031 |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion