Reduce Portfolio Risk with Real Estate and Gold
The following is a guest post. If you’re interested in submitting a guest post, please check the guidelines on our contact page.
Investment gains and losses are often viewed in a limited context. A focus on short term returns causes many investors to lose perspective of broader risks, such as having a portfolio that rises and falls in tandem with the market.
Thankfully, there are convenient ways to invest in asset classes that are negatively correlated to the broader market. These asset classes include real estate and gold. Despite volatility, limited exposure to these hard assets can reduce portfolio risk.
Here are some choices and strategies to consider:
Real Estate Investment Trusts (REITs):
Direct investment in real estate is out of reach for most individuals. Aside from market knowledge, the required financing and liquidity can pose challenges.
For investors of all budgets, publicly traded REITs offer low cost exposure to real estate without the hassles of owning property. A real estate investment trust is a corporation that owns a mortgage or real estate portfolio. Many are hybrid REITs that both loan money and collect rent payments.
Unlike owning real estate, REITs are liquid and are easily bought or sold. Elliott Broidy and other money managers may buy these securities as alternatives to using leverage.
As securities that trade on major stock exchanges, you can buy REIT shares through discount brokers. For income investors, the American IRS requires REITs to pay out 90% of taxable income to shareholders.
This allows you to earn passive income in the form of monthly or quarterly dividends. Since real estate is a volatile asset class, dividends also buffer share prices if reinvested.
Much like the broader economy, real estate markets are dynamic. High interest rates can increase demand for rentals, while cheaper lending can spur surges in mortgage volume. Owning hybrid REITs helps you capitalize on separate real estate trends in a cost efficient manner.
International REITs give you access to global real estate markets that are otherwise not available. Investing in real estate overseas is made difficult by currency conversions and restriction on foreign property ownership, among other challenges.
Examples of REIT Investing Strategies:
Currency adjusted returns can be increased through foreign REITs. By buying REITs focused in markets with stronger currencies, dividend payments are also boosted when converting to dollars or pounds.
Demographic trends can affect real estate markets. An elderly population and healthcare overhauls have brought increased attention to medical related stocks. Specialty REITs that focus on hospitals or geriatric care help you benefit from the real estate aspect of healthcare demand.
Currencies are fiat money, meaning they have no intrinsic value. A dollar or pound would simply be colorful paper without the assurance of governments. This wasn’t always so, as money used to be backed by gold.
Today, the link between gold and money is still apparent. Many investors turn to gold as a store of value during troubled economic times.
During periods of weak currencies or high inflation, gold investments can be a valuable hedge. Since changes to economic indicators are difficult to predict, holding a small portion of your portfolio in gold related investments may be appropriate.
How to Buy Gold and Investing Ideas:
Feeling bearish about the equity markets and economy? There are several convenient ways to buy gold. You can buy gold bullion as hard asset that helps preserves purchasing power. For greater liquidity, consider gold mutual funds or shares of mining and exploration companies.
Based on factors such as your time horizon and risk tolerance, gold or real estate investments may warrant a look.
Hard assets often move in different directions from the broader market. Either as securities or in physical form, volatile asset classes can reduce your portfolio risk.