An updated analysis conducted by Ibbotson Associates found that allocating 20 percent of a balanced stock and bond portfolio to REITs each year from 1972 to 2003 would have boosted the average annual return by 100 basis points (from 9.2 percent to 10.2 percent) while reducing portfolio risk by 120 basis points (from 10.5 percent to 9.3 percent).

In addition, Ibbotson’s analysis shows that the correlation of REIT returns to the returns of other stocks and bonds has declined significantly over the last 10 years. From 1994 to 2003, the correlation of monthly REIT returns to large stock returns declined to 0.27, the correlation with small stock returns declined to 0.23, and the correlation with bonds declined negative 0.15 over the same time period.

As a result of these investment characteristics, the Ibbotson analysis demonstrates that REITs are a significant source of portfolio diversification, both raising returns and lowering risk in a wide range of investment portfolios.

Correlation of REIT Returns With Other Assets

Source: REITs—NAREIT Equity Index; Small Stocks—Ibbotson U.S. Small Stock Series; Large Stocks—Standard & Poor’s 500; Bonds— 20-year U.S. Government Bond.

Stocks and Bonds	With 10% REITs	With 20% REITs
Return 10.9% Risk 10.8%	Return 11.2% Risk 10.4%	Return 11.5% Risk 10.1%
Source: Ibbotson Associates; Large Stocks—Standard & Poor’s 500; Bonds—20-year U.S. Government Bond; T-Bills—U.S 30-day T-Bill; REITs—NAREIT Equity Index.