My F&M

Real Estate Allocation

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As we’ve discussed in previous issues, one of our primary objectives in helping you reach your goals is to find ways of reducing the risk of your portfolio without reducing its return potential. Risk comes in many forms but in this case we are speaking about the fluctuation of your portfolio value (or return).

One of the best ways to reduce risk is to broadly diversify a portfolio across many different types of assets, such as stocks, bonds, and most recently alternative assets. The next asset class that we would like to more broadly incorporate is real estate.

We have monitored these investments for years, and just like international and alternatives, we believe that real estate can play an important role in diversifying a portfolio. Specifically, real estate has historically exhibited risk-return characteristics that are different from or have a low correlation with traditional stocks and bonds.

In addition, while market timing is not a component of our overall approach, real estate prices have fallen back from their peaks. So it seems like an opportune time to include this asset class.

The two main ways we will seek to include a real estate allocation in portfolios are through REITs (real estate investment trusts) and/or private equity investments. We will be using the NAREIT (National Association of Real Estate Investment Trusts index) to measure the performance of this specific asset.

Over the coming months, we will most likely be recommending a 5% real estate allocation (and a 5% stock reduction). We will be contacting you to discuss the changes and the subsequent revision of your investment policy.