Stocks vs. Real Estate

Mama told you not to put all your eggs in one basket. And so it goes with investments. Diversifying among asset classes, industries and investment vehicles makes you safer. When one falls, another rises. Amassing a diversified portfolio of individual stocks, bonds and other paper assets may take a lifetime of saving. But with a cash outlay of $2,500 or so, you can get instant variety by purchasing a mutual fund or an exchange-traded fund.

Not so with real estate. Unless your surname is Trump or Helmsley, you're not likely to have the means to own the hotels, stores, apartments, office buildings, parking garages and casinos you'd need to achieve a properly diversified real estate portfolio.

There is, however, a real estate investment that offers the low costs and low maintenance of stock: the equity REIT, a company that owns a batch of commercial properties. The shares trade on national stock exchanges, and Francis and Ibbotson found that equity REITs returned more than any other asset class except small-cap stocks.

But as an asset class, REITs don't behave much like property. They can drop like rocks in a well. In their worst year, they lost 17.5%. And they've never returned as much as they have in recent years, when they've benefited from investors' enthusiasm for both the real estate and stock markets.

There's no way to know whether that streak can continue or whether this is an asset class that's just about punched itself out.