There has been a great deal ofdebate about the role of realestate in a mixed-asset portfoliodesigned for the individual investor. Somequestion whether investing in differenttypes of real estate investment productswill actually enhance portfolio performanceto deliver maximum total returns.Does allocating 10% to 20% of one's portfolioto private real estate and publiclytraded real estate investment trusts (REITs)add efficiency to a mixed-asset portfolio?What about private real estate investmentsvs publicly traded REITs?
Recently I undertook an academicstudy of studies to evaluate whether realestate—both traded and nontraded—has aplace in a portfolio of stocks and bonds.
As used in this article, private or directreal estate refers to an investment in abuilding or a nonpublicly traded investmentsuch as a nonpublicly traded REIT, limitedpartnership, or other form of privatesyndication. The term "publicly tradedREIT" refers to a real estate investment truststock that is traded on a public exchange,such as the New York Stock Exchange.
To frame the study, I decided to evaluatethe findings of real estate investmentresearch that utilizes Harry Markowitz'smodern portfolio theory, which provesmathematically that by diversifying investments,the investor can lower the risk oftheir portfolio or, conversely, earn a higherreturn for the same amount of risk as anundiversified portfolio.
Real Estate Findings
Conclusions about the role of realestate in a mixed-asset portfolio that canbe drawn from this academic studyinclude the following:
Clearly, there are benefits that realestate offers to disciplined investors.However, the challenge for an individualinvestor is to determine how to takeadvantage of the asset class to constructa portfolio that will achieve their long-termfinancial goals.
In order to determine how to incorporatethis asset class into an individualportfolio, investors should become familiarwith both nontraded and publiclytraded real estate investments. It'simportant to know the characteristics ofeach in order to help determine howmuch real estate an investor should considerplacing in a mixed-asset portfolio,along with the implications for theinvestor. Consult with your financialadvisor to determine the allocation bestsuited to your portfolio.
Roy T. Black, PhD, JD is associate executive director
of the American Real Estate Society and is a
member of the American Real Estate and Urban
Economics Association. He is the author of The
Georgia Real Estate Guide to License Law,
Brokerage, and Related Topics (Georgia Real
Estate Commission; 1995). The study was funded
by Wells Real Estate Funds. The views expressed
are solely those of Dr. Black and not of Wells Real