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Financial Literacy - Financial tuneup
OVERVIEW
Investing fundamentals
Here's the lowdown on the pros and cons of the basic types of investments.
Investment tuneup

Building blocks for successful investing
Investments:
Stocks
Mutual funds
Bonds
TIPS
REITs
ETFs
CDs

REITs
The National Association of Real Estate Investment Trusts defines REITs as companies which own or operate income-generating commercial real estate. The structure of the company allows investors to buy into real estate the same way they could purchase a mutual fund. In order to qualify as a REIT, the company must derive a certain portion of its income from real estate and provide 90 percent of its earnings to shareholders every year.

REITs hold all kinds of real estate-related holdings. "Sometimes people get confused and think they are all the same," says Kinder. Some hold mortgage loans or they can be apartment buildings, shopping malls, warehouses or even timberlands, he says.

Advantages and disadvantages of REITs
Pros
According to Kinder, because REITs provide 90 percent of their earnings to their shareholders every year, they avoid taxation at the corporate level and pass basically all of their earnings on to the shareholders.
Commonly used as a tool for diversifying within a portfolio, REITs and other asset classes, such as commodities and natural resources, have a low correlation to the stock market. "Noncorrelating means that returns don't move in the same direction all the time. That tends to smooth out your portfolio earnings," says Brosious.
Actively managed funds, index funds and ETFs enable investors to get exposure to the real estate market.
Con
"They aren't tax-efficient because they do pay a higher dividend," says Kinder. Plus, these dividends are taxed at ordinary rates. "It doesn't get the 15 percent dividend pass that stocks do. So if you hold it in a taxable account it can hurt you as opposed to an IRA or a 401(k)," says Kinder.
-- Updated: June 11, 2009
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