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Baby boomers looking for a smoother investment ride may want to consider real estate investment trusts as one set of shock absorbers when the jaunt down Wall Street gets bumpy.

Financial advisors say that when REITs are used properly, they can reduce volatility and increase diversification in a portfolio.

REITs are “an excellent diversifier in a portfolio” because they move countercyclical to U.S. stocks, says Christopher Cordaro, chief investment officer with RegentAtlantic Capital, Chatham, N.J.

REITs offer boomers access to institutional quality real estate with a very low initial investment and low management fees, he adds.

Unless a boomer has more than $100,000 to invest in individual REITs, suggesting a total portfolio in excess of $1 million, then it is better to invest in REIT mutual funds, according to Cordaro.

REITs work well within an IRA, says Cordaro, because dividends paid by a REIT are tax-deferred.

And, in these times of uncertain corporate governance, he continues, dividends can be a comfort because “you cant fake a dividend.”

A REIT can be a viable part of an investment portfolio, says Elizabeth Greak of Comer & Greak Financial Consultants, New Haven, Conn.

But, boomers need to invest cautiously, she adds. Greak says she usually recommends REIT mutual funds rather than individual REITs to ensure diversification and liquidity.

And for boomers who do decide to invest in individual REITs, Greak recommends reading prospectuses.

One potential client who already had purchased a REIT did not read the prospectus and, consequently, did not realize that the REIT management intended to buy hotel properties and that the promised return would take time to achieve, she says. So, “it became a longer-term investment all of a sudden,” Greak says.

A properly selected REIT fund can be a good investment for boomers who are at the stage in life where they need income and have an intermediate time horizon, she says. Additionally, a client needs to feel comfortable with a REIT, Greak continues.

If a financial advisor is looking at a REIT as a piece of a boomers portfolio, consideration needs to be given to the viability of the properties, the length of the leases, and the demographics and business prospects of the area the REIT invests in, she adds.

Owning a REIT is like owning a single stock because there is just one management, says Mike Dubis, president of Touchstone Financial, Madison, Wis.

There may be a number of properties in the REIT, but there is only one management and different managements can have different drivers. For instance, he explains, a REIT might be driven by the needs of a pension fund rather than a focus on individual investors.

Usually, Dubis says he recommends investing in the REIT market through index mutual funds.

He also recommends that any boomer considering a REIT or a REIT fund should think of it as buying a business. “You need to take ownership of it,” he adds.

If a boomer invests directly in REITs, then considerations include diversifying in REITs that invest in office, residential and mortgage-backed securities, as well as a consideration of transaction fees and costs, he says.

Other recommendations he makes include holding a REIT investment for at least a 10-year period, and looking beyond “the noise” of market fluctuations and understanding the true value of the assets within a REIT.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.