Ask the Fool Rebalancing and REITs

Q Can you explain portfolio rebalancing? — R.W., Laramie, Wyoming

A It’s when you adjust the percentage of your portfolio invested in asset classes such as stocks, bonds and cash. Imagine that you start with a desired portfolio mix of 80% stocks and 20% bonds. Over a year or two, if some stocks grow briskly, you might end up 90% in stocks and 10% in bonds. If so, you might sell some stocks and buy some bonds.

You can also rebalance within an asset class. If one of a dozen stocks you own shoots up tenfold over a year or two, it will represent a big chunk of your portfolio. To rebalance, you might sell some of its shares and buy other shares in order to have fewer eggs in that one basket.

Q What does REIT mean? — D.L., Washington, Pennsylvania

A It stands for “real estate investment trust.” REITs are companies that let you invest in real estate without buying any actual properties. Instead, you just invest in one or more REITs, which own (or finance) properties that produce income, often in categories such as offices, apartments, shopping centers, data centers, warehouses, medical facilities— even cellphone towers or timberlands. (Most REITs own real estate, but there are also mortgage REITs, which are very different: They finance real estate and collect income from interest instead of rent.)

REIT shareholders enjoy diversification across many properties — and also often receive significant dividend income, because REITs must pay out at least 90% of their taxable income to shareholders. REITs generally trade like regular stocks on stock exchanges; those listed that way own more than $2 trillion worth of U.S. assets. Learn more at REIT.com.