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Does Real Estate Deserve a Place in Your Portfolio?

By Paul J. Carroll, CFP®May 12, 2016December 3rd, 2023Videos

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We get a lot of raised eyebrows when I discuss the role of real estate in a well-designed diversified portfolio. Does real estate belong in your portfolio?
Hello, my name is Paul Carroll. I’m the CEO and founder of Efficient Wealth Management, a boutique wealth management firm based here in The Woodlands, Texas.

In 2008, after the real estate crisis resulted in an almost global meltdown, it seems like it can now be somewhat difficult to make the case for real estate as an investment, and yet it still makes sense to invest in real estate through ETFs, REITs, and various other devices. What’s poorly understood is, it wasn’t real estate so much as the mortgage industry that created this problem. In fact, a composite index of American REITs has outperformed the S&P 500 for every 5-year period in over 40 years, according to NARIT, the National Association of Real Estate Investment Trusts.

Why are these trusts such great investments? Well, the United States law insists that these funds must pay out 90% of their cash earnings. As you know, cash is king. There’s nothing that compares to it, not profits, not paper, not phantom income; and these cash-rich investments receive their rents from various commercial, residential, and industrial properties. In addition to the fact that they’re great cash generators, these investments have moderate, if any, sensitivity to interest rates initially, but long term, they hold up quite well in a rising interest rate environment. In addition to that performance, they’re a great addition to a well-diversified portfolio because they’re poorly correlated with equities. Why is this valuable? Well, less correlated assets add diversification value by smoothing long-term returns.

Finally, portfolio real estate is a superior inflation hedge. Though not an issue today, these products gain in income and value when in an inflationary environment, yet unlike gold, they add value in the interim also. Now, there are some tax consequences, and this type of product is best held in diversified bundles within ETFs or funds of REITs, and held within a tax-qualified account if at all possible. Now, I do have favorites. There are a number of quality ETFs, but for the best value, a globally diversified portfolio is required. We can use a number of ETFs to do the job, but possibly the best tool out there, in my opinion, is the Dimensional Global Real Estate Securities Portfolio. Unfortunately, it’s not available to the public, and you do have to work with a Dimensional advisor enabled to get this product. As an example of the quality of this product, it has just 1% annual turnover, and a year-to-date return  ̶  we’re only in May   ̶ of 9.4% already. Real estate really does belong in your portfolio.

We wish you the best of investing success.
DFA Global Real Estate Securities Port. Morningstar. (Accessed May 9, 2016).

Wasik, John. “You Too Can Be a Global Real Estate Investor.” The New York Times. (Accessed May 9, 2016).

Willem, Jan. “Why Real Estate Should Be in Your Portfolio.” Barron’s. (Accessed May 9, 2016).

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Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.