Are REITs worth it?

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(Money Magazine) -- Question: I've been told real estate investment trusts offer great diversification. But do they really? Last year REITs lost 38% - that's a bit worse than the S&P 500. --Brian M., Greenwich, Conn.

Answer: Historically, devoting part of your portfolio to real estate investments trusts - shares of firms that own or manage properties - has indeed raised your returns and reduced your investment risk. You don't have to search too far to find a time when holding REITs boosted your returns: From 2000 through 2002, when the S&P was down 38%, REIT indexes returned 49%. And since 1972, investing just 10% of your stock holdings in REITS would have smoothed out your portfolio's overall ride.

Sadly, what's true over the long term isn't always true over the short. Being diversified won't guarantee against short-term losses, especially during a global financial crisis, explains investment adviser Richard Ferri. "Twenty percent of the time it isn't going to help you to have REITs," he says. "We just happen to be in that 20% right now."

To prepare your portfolio for the majority of time when the asset class does help, Ferri suggests putting 10% of your stocks into REIT funds. Two choices from the Money 70: Cohen & Steers Realty (CSRSX) and Vanguard REIT Index (VGSIX).

Question: Two years ago an adviser convinced me to open a Roth IRA. I'm putting in $416 a month, paying a 5.75% load every time. Should I keep paying the fee, since I don't know much about mutual funds? Or should I move the money? --Magnolia Olmedo, Los Angeles

Answer: You're off to a good start: You at least know enough about funds to suspect that you don't have to pay a 5.75% load to have a decent portfolio. Not that there's anything wrong with the two large-cap American Fund offerings your adviser put you into: EuroPacific Growth (AEPGX), an international fund that's on the Money 70, and Washington Mutual Investors (AWSHX), a U.S. portfolio. But for that kind of up-front cost, you should be getting ongoing advice - which you're apparently not, since you told us your only contacts with the adviser are occasional sales calls.

So what to do? June Schroeder, a certified financial planner in Elm Grove, Wis., advises you to leave your current Roth alone. It holds good funds, and it's not as if you'll get the load back by selling. But rather than add new money to that account, she suggests opening a new Roth at a no-load fund giant such as Fidelity, T. Rowe Price or Vanguard, where you can educate yourself about investing and build a portfolio of low-cost, diversified funds.

One idea for starting out: Split your money between Vanguard's LifeStrategy Moderate Growth (VSMGX) and STAR (VGSTX) - funds that expose you to a mix of stock and bonds. "It's like having your own investment adviser for almost nothing," says Schroeder.

Looking for some answers? Send us your questions about investing. E-mail answer_guy@moneymail.com.