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THE STEADY STAPLES OF A WELL-BALANCED PORTFOLIO

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funds that cover insurance companies, but there is no federal govern- ment insurance covering GICs that would be comparable to the FDIC’s insuring bank deposits. While they aren’t as safe as federal insurance protection, your principal will remain safe even when interest rates rise, barring default by the issuing company.

REAL ESTATE INVESTMENT TRUSTS

Real estate investment trusts, or REITs, are corporations or business trusts that meet federal tax law requirements to be a REIT.They function like closed-end mutual funds, which we discuss in Chapter 5. REITs generally invest in real estate and offer their investors marketability, cen- tralized management, limited liability, and continuity of interests. Plus, REITs can avoid corporate income tax because they pass their earnings along to their shareholders. The distributions are taxed as ordinary income to the shareholder. However, they cannot pass along their losses.

The type of real estate behind a REIT can vary considerably between the different issuing companies. For instance, one REIT may hold the property of hotels, while another may hold restaurants. REITs may also differ in size and origin. While some REITs may be a mix of different types of real estate, some specialize in particular kinds.

Many REITs are traded on organized stock exchanges, and there- fore, will be followed and evaluated by independent researchers and firms. There are some that aren’t publicly traded, and aren’t indepen- dently evaluated. When you purchase shares of a REIT that isn’t pub- licly traded, there is almost no secondary market for the shares, which may result in you selling your shares at a possibly reduced rate, sometimes dramatically reduced, depending upon the buyer.

While last year proved to be a poor year for stocks and mutual funds, it was a good year for REITs. Many mutual funds were strug- gling just to break even, but depending on which index you looked at, REITs were pulling in a total return in the mid-20-percent range. Plus, the dividend yield for many REITs last year was around 11 per- cent. That’s a far cry from the stocks and mutual funds that most peo- ple were invested in. Rather than lose money last year on their investments, my clients who were invested in REITs saw that seg- ment of their portfolios make money.

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