David Robinson

The key is to know exactly what you’re getting into to avoid surprises.

Real estate has long been an essential part of a well-diversified investment portfolio, but now it’s even more essential.

As of last year, equity investments in pooled real estate vehicles became an official sector under the investment classification system used by Dow Jones Indices and MSCI Inc. Thus, these investments, known as real estate investment trusts (REITS) 

 sector in this industry classification system

Real estate is the first new sector added since the Global Industry Classification System, created in 1999, established the 10 original sectors. 

This new status reflects the meteoric growth of REITs in the global economy. Over the last 25 years, the total market value of REITs listed on the planet’s equity exchanges grew 

 — nearly 4% of the total capitalization of the S&P 500, according the National Association of Real Estate Investment Trusts (NAREIT).

Even before the new status, REITs were in a growth cycle. And currently, on average, REITs are yielding as much as 4.5% annually — twice the yield of the S&P 500. 

Becoming an official sector is expected to continue propelling REIT growth in general because now, to check off the box on all 11 sectors, investment managers buying shares for mutual funds and exchange-traded funds must add real estate to their investors’ portfolios, usually through REITs.

For all of these reasons, it's a good time for physicians to consider adding real estate to their long-term investment portfolios. Atop all this, there’s a pressing reason to do so now: to achieve diversification amid a perilous bond market.

Historically, investors have sought to diversify their stock portfolios with bonds. But the bond market is beset by the problem of rising interest rates and is forecasted to continue. This means new bond issues must pay higher rates to attract investors seeking to protect their bond holdings from the ravages of rising rates.

If you own several long-term bonds that pay 2%, while new issues pay 4%, your bonds are worth less on the secondary market because no one will want to buy them — you can however, keep them until maturity and sustain damage from inflation. This is what’s happening after a 30-year bull bond market characterized by historically low interest rates.

As rates are now rising, ending the party, investors seeking to offset the risk to their portfolios of volatility inherent in stocks must turn to something other than bonds. One option is real estate, which has long been known as a desirable alternative investment — an alternative to stocks and bonds, known as traditional investments.  

REITs are protective diversifiers because, unlike bonds, they have the advantage of pricing power during inflationary periods; landlords can raise rent to keep up with inflation.

There are different ways to own real estate as an investment, each carrying different inherent levels of risk, liquidity and transparency that you should understand before investing. 

		Owning real estate directly. This requires loads of cash up front and the willingness to suffer the disadvantages of low liquidity — the inability to sell the property quickly because of market factors. You don’t have to worry about the transparency of the owner entity involved because you 

the entity. These investments aren’t suitable for most individuals — even the wealthy — and the low liquidity can pose significant risk. If you need your money back in a hurry, you might have to sell cheap and take a bath. 

		Investing in private equity funds or hedge funds that own property throughout the country or the world. “Private” means they aren’t publicly traded and, to some extent, make their own rules. As a result, these funds can be fairly opaque — and highly illiquid; it might take years to get out. And management fees can be onerous. Managers get rewarded for beating benchmarks, so they have every incentive to increase leverage — i.e., to borrow money to make investments to turbocharge returns.

 These are often sold by salesmen who call you or come to your door, earning high commissions that are indirectly taken out of your investment. This reduces your net returns in the long run. The non-public nature of these investments typically reduces transparency. Liquidity can also be a problem. Typically a mutual fund can never buy more than 5% of the total shares of any particular holding, but private equity/hedge fund REITs can acquire excessive concentrations of 1 or 2 holdings, increasing risk.

Actively traded mutual funds that own exchange-listed REITs.

 These investments are highly transparent, but investment managers can effectively lower net returns for existing shareholders through excessive trading, resulting in a high turnover ratio. And if you want to sell your shares because values are rapidly going south, you must wait until the stock market closes at 4 p.m., and take the price it gives you. 

As with mutual funds, you merely own shares. Yet there’s low turnover in these passively managed investments, and fees can be extremely low because there’s little management per se. Also, as ETFs are traded on exchanges like stocks, you don’t have to wait until 4 p.m. to sell; you can get out at any time during the trading day. 

Thus, ETFs tend to be the most transparent, lowest risk, lowest cost and most flexible option. Yet, depending on individual proclivities, cash reserves and risk tolerance, some high-net-worth individuals may, after carefully investigating risks and clarifying the rules and dynamics, be attracted to the higher-cost, less opaque options if they have the resources available and are able to tolerate illiquidity.

David Robinson, a Certified Financial Planner®, is founder and CEO of RTS Private Wealth Management, an SEC-registered advisory firm in Phoenix, Ariz., that provides fiduciary services to help clients achieve their financial goals. He specializes in helping wealthy individuals — such as physicians, executives and professional athletes — prepare for the future by creating custom financial plans that employ a holistic approach, including growing/protecting wealth, managing taxes, identifying insurance solutions, preparing for retirement and managing estate plans.

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Successful investing hinges on focusing on the factors you can control.

Dentists are aware that they can’t control all patient outcomes, and they focus on the things they can control to produce the best results.

The same goes for investing, a field fraught with unknown factors that can affect returns. Amid this vast cosmos of uncertainty, the only intelligent approach is to focus on the factors that you can control.

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Sure, you can study stocks and other investments into the night, and sometimes this study will pay off — despite the myriad unknowns. But regardless of how well you do, the results are ultimately beyond your control. This makes controlling what you can critical to your ability to influence portfolio outcomes.

There are only four factors that you can control, and all four have a significant impact on investment returns. These factors are:

The degree of risk investors take should be consistent with their individual risk tolerance and, once they retire, their cash flow needs. Many people wrongly assume that they can identify their tolerance for investing risk, but this can actually be a difficult thing to determine, in part because it’s often different than tolerance for other types of risk. Then you must determine the types of investments that are consistent with your tolerance. The higher the risk tolerance, the more investment volatility exposure you can take to seek potentially higher returns than are likely with lower-risk, lower-volatility investments. Cash flow is related. A higher need for cash from your portfolio during retirement tends to dictate a lower risk profile so that your assets have more protection. To determine this need, do a cash flow analysis or ask your advisor to do one.

This subject has many nuances, but one important fundamental is to be aware of the different tax rules assigned to different types of accounts. Too many investors fail to take full advantage of tax-deferred accounts, such as 401(k) plans and individual retirement accounts (IRAs). Even if they do, many lack a strategy for what kinds of investments to hold in tax-deferred accounts versus taxable accounts. A good rule of thumb is to keep stocks in taxable accounts and corporate bonds in tax-deferred accounts. By doing so, you lower your tax bill by minimizing ordinary income, while retaining the advantage of offsetting equity gains with any equity losses. Known as tax loss harvesting, this is a classic tax-efficient investing move.

Too many investors have no clear idea of what they are paying in fees. This is unfortunate, because, like taxes, fees have a huge impact on net returns — the money you ultimately get to keep. First, if you have an advisor, fully understand what these charges are and how they’re determined. For advising you and managing your assets, it’s not uncommon for advisors to charge 1 percent of the assets under management, though portfolios worth $1 million or more often go for less, perhaps .75 percent. Then, get a grip on the charges from your investments. On funds, lift the hood to determine expense ratios, and the expense from turnover. In a fund, the more of the total portfolio that turns over in a year, the higher the trading costs will be. All costs are passed along to shareholders. Ideally, you should limit this to 15 percent to 25 percent per year. If a fund is annually turning over a significantly greater percentage, this not only gets expensive, but also raises questions about the integrity of the fund. While some funds do well with a certain degree of turnover, those whose managers don’t seem to believe in assets with good long-term investable propositions may not be running funds for individuals seeking to be long-term investors.

Not only do you want an advisor who does not charge exorbitant fees, but you also want one whose advice is reliably free of conflicts of interest, so you can be assured that the advice is in your interest, not the advisor’s. Some advisors wear two hats — the advisory hat and the sales hat, as they earn commissions from the companies holding some of the investments they may recommend. This is not inherently a negative situation, especially if the advisor discloses all commissions and objectively explains why an investment is suitable for you and your portfolio. If they don’t bring this up, ask for written disclosures.

If you tend to these four considerations, you’ll go a long way toward controlling the only controllable items in investing, greatly increasing your chances of success.

David Robinson, a Certified Financial Planner®, is founder and CEO of 

, an SEC-registered advisory firm in Phoenix, Arizona, that provides fiduciary services to help pre- and post-retirement clients achieve their financial goals. He specializes in helping wealthy individuals — such as physicians, executives and professional athletes &mdash; prepare for the future by creating custom-tailored financial plans that employ a holistic approach including growing/protecting wealth, managing taxes, identifying insurance solutions, preparing for retirement and managing estate plans.

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You could devote months of study to trying to master the workings of the market and you might not get anywhere. Thatâ€™s because your study needs to focus on the investing factors you can control. The four factors include knowable risk, taxes, fees, and determining advisor conflicts. Hereâ€™s how to address all four to make sure youâ€™re investing in the stock market soundly, and that your retirement is on the right path.