Reassessing Real Estate Risk

Although a near-term collapse in real estate is highly unlikely, now is a great time for individuals to re-evaluate their holdings and exposure to the sector. Better to do it when everything's turning up roses vs. waiting until the market cools, or worse.

So How Much is Too Much?

Real estate has always been and will continue to be a very sound investment. But like anything else, just make sure you allocate the real estate portion of your portfolio properly, more especially because the Federal Reserve seems intent on tightening further and the threat of an economic slowdown is ever pending.

"It's reasonable to assume that going forward, real estate will do reasonably well but don't expect [gains of the] last three years to continue forever," says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research.

Because real estate is generally less correlated to stocks and bonds, it's a great way to hedge your portfolio. But the sector does tend to err on the riskier side, so your risk tolerance will dictate how much you own.

To start, the home you live in should not be viewed as part of your real estate investment portfolio, says Spiegelman. Your equity in the home should be included in your personal net worth, but the home should be separate from your investments.

If you have a very aggressive portfolio, Herb Daroff, a C.F.P. and J.D. at Baystate Financial Services in Boston, suggests exposure of anywhere from 10% to 20% to real estate, whereas a very conservative portfolio should probably stay clear of it all. A good middle-of-the-road growth and income portfolio could probably hold around 5% to 7% in real estate.

Whether it's two-family homes or real estate funds, there are ways for investors to get practical exposure.