Problem: How to diversify my portfolio with real estate.

        Strategy: With real-estate investment trusts (REITs) instead of direct land or buildings.

        The Financial Planning Association says mixing real estate with other elements of your portfolio can help smooth out volatility.

        Mutual funds are probably the easiest way. A real-estate mutual fund typically focuses on REITs or real-estate related companies such as construction. Mutual funds provide the advantages of minimal initial investments, diversification, professional management and ease of liquidity.

        Or you can buy REIT stocks. The dividend yield on REITs as a whole has averaged nearly 7.4 percent the last seven years. Price appreciation may add to their total return.

        REITs are bought and sold like individual stocks, one of their biggest drawbacks. You have to research them as thoroughly as you would a stock, and many investors lack the time and expertise. Furthermore, because an individual REIT typically focuses on a specific type of real estate, often in a specific area, buying only one or two REIT issues provides no diversification. REIT mutual funds are often a better option.

        To buy land or buildings directly you'll probably need to borrow money, and you'll become a landlord with midnight calls for broken plumbing. This also is a complicated tax area involving depreciation, mortgage interest, management fees, sale and other issues. Investment risks include vacancy rates and weak or declining real-estate markets. It's difficult to diversify unless you can own several properties in different real-estate markets. Direct ownership also lacks liquidity.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.

        Planners: Share your tips with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati 45202 or e-mail ahiggins@enquirer.com.

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