Tall oaks from little acorns grow.
If you want your retirement savings to work hard for you, there are four main changes you must make in the equity part of the standard pension fund's portfolio. The first is to add real estate companies. Another is to expand the asset mix to include stocks of smaller companies. A third is to include value companies that are out of favor. The fourth is to include international companies, those headquartered outside the United States.
This chapter explores the first two of these changes. We'll see how real estate investment trusts (REITs) can add return and reduce risk. And we'll look at why small companies have historically produced bigger returns and how you can easily and efficiently capture them.
When most people think about owning real estate they think about owning their homes. But home ownership is sometimes overrated strictly as an investment. Commercial real estate is another matter. Adding a widely diversified portfolio of professionally managed residential and commercial properties can give a nice boost to an equity portfolio while reducing its risks.
The size effect—in other words, the benefit of owning smaller companies—is primarily a matter of potential. Investors looking for growth need to put their money where the growth potential lies, and one of those places is small companies. (Who's likely to grow more over the next year—a 13-year-old boy or a 27-year-old man?)