That's right. The bogeyman of this downturn should still—someday—be a viable part of your portfolio. The housing bust makes it easy to shun the sector entirely, but real estate investment trusts, or REITs, historically offer unique risk-management benefits.
Over the past 20 years, REITs have helped juice returns and smooth out volatility. A sample portfolio from 1978 through 2007 shows that putting 10 percent of equity holdings in U.S. REITs improved returns by 0.3 percent and cut volatility by 0.9 percent, compared with investing in stocks alone. Real estate tends not to move in tandem with stocks, and it has almost no correlation with short-term bonds. (The obvious exception to the rule: 2008, when popular indexes like the Vanguard REIT ETF [VNQ] are off more than 40 percent year to date, just like equities.)
Real estate is a "low-correlating asset, not a no-correlating one, but that doesn't mean diversification isn't working," Swedroe says.