To diversify a REIT-heavy portfolio, first measure how much of your total investments is tied to real estate, then compare your overall mix with an allocation suited to your goals, time horizon, and tolerance for risk. You can move toward that mix by directing new contributions to underrepresented assets, selling some overweight holdings, or combining both approaches. There is no universal REIT percentage that fits every investor.
Start by measuring your total real-estate exposure
Count holdings across all relevant accounts rather than judging concentration from one brokerage statement. Include individual REIT shares and funds that hold REITs, and consider other real-estate investments you own. A fund’s name alone may not reveal its full exposure; review its current prospectus and holdings information.
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Also distinguish property REITs from mortgage REITs. Many REITs specialize in a particular property type, while mortgage REITs invest in real-estate debt and tend to be more leveraged than property-focused REITs, according to the SEC’s bulletin on publicly traded REITs. Owning several REITs therefore does not necessarily mean you are diversified across asset classes—or even across real-estate risks.
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Choose a target mix for your circumstances
Asset allocation means dividing investments among broad categories such as stocks, bonds, and cash. Diversification spreads investments across assets to lower overall portfolio risk; it does not eliminate risk or guarantee a gain. The SEC notes that an appropriate mix depends on factors such as risk tolerance and timeframe. A portfolio designed for a long-term goal may differ from one intended to fund near-term spending.
Decide what mix makes sense for your own circumstances before choosing what to sell or buy. The SEC’s asset allocation and diversification guide explains the relationship between allocation and diversification, but it does not prescribe a universal REIT allocation. Avoid treating a particular percentage as a rule for all investors.
Compare the current mix with the target
Once you have a target, compare it with your portfolio’s actual exposure. This shows whether real estate is overweight relative to your plan and which other categories are underrepresented. Look at concentration within the REIT portion as well: a portfolio concentrated in one property type or strategy can carry risks that a simple count of holdings will not show.
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Consider the kinds of exposure you would add, not just the amount of REIT exposure you would remove. For any potential addition, assess whether it broadens exposure beyond real estate, how it fits your time horizon and risk tolerance, and whether it is diversified within its own category. Liquidity, fees, and the tax effects of selling or holding in a particular account also matter. The SEC’s discussion of asset allocation, diversification, and risk provides further context on evaluating investment risks.
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Rebalancing brings a portfolio back toward a chosen allocation. The SEC describes several general approaches; none requires that every investor sell REITs immediately.
- Direct new contributions: Put new investment money toward categories that are below your target, rather than adding to an already overweight category.
- Adjust ongoing contributions: If you invest regularly, change how future contributions are divided among categories.
- Sell overweight holdings and buy underweight assets: This can move the portfolio toward its target, but selling may have tax consequences and transaction costs.
- Combine the approaches: Use contributions to address some of the imbalance and consider sales for the remainder, taking account of your circumstances.
These are general methods, not a recommendation to sell a particular investment. Before a transaction, check applicable fees, liquidity, and tax consequences. The SEC outlines these rebalancing approaches in its asset allocation guide.
Check the REIT structure before deciding what to hold
Liquidity and valuation can differ substantially by REIT structure. Publicly traded REITs have exchange-traded prices and are typically liquid. Non-traded REITs can be difficult to sell or value, may charge high fees, and may pay distributions partly from offering proceeds or borrowings, according to the SEC bulletin on non-traded REITs. Review the current offering documents and disclosures before making a decision; do not assume that a stated distribution represents income generated by the underlying properties.
REITs can also respond differently to interest-rate changes. Property REITs and mortgage REITs have different exposures, and mortgage REITs tend to use more leverage. Diversifying away from real estate may broaden a portfolio’s sources of risk, but it does not make the portfolio risk-free.
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A sale can have tax consequences that depend on the investment, account, and investor. REIT dividends generally do not receive qualified-dividend tax treatment, but the effect on an individual investor depends on their circumstances. The SEC discusses REIT dividend taxation in its publicly traded REIT bulletin. Consider consulting a qualified tax or financial professional if the consequences of selling or changing holdings are unclear.
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