A 2024 Morningstar Associates analysis, sponsored by Nareit, found that the optimal portfolio allocation to REITs ranges from 4.2% to 20.0% across a range of lifestages. For investors with a 45-year to 25-year time horizon, the optimal allocation to REITs is 20.0%. The optimal allocation to REITs gradually declines over time from 11.0% for investors at retirement to 4.2% for investors 15 years into retirement.
In this analysis, Morningstar used Black-Litterman methodology, a mean-variance optimization methodology which is well respected by the institutional investment community. Portfolio managers use this methodology as a tool to understand how to optimally allocate investments across different asset classes. The Black-Litterman model is an extension of traditional mean-variance optimization, which asserts that an investment’s risk and return characteristics should not be viewed alone but should be considered based on how the investment impacts the overall portfolio’s risk and return.
The Black-Litterman approach seeks to avoid the often-extreme unconstrained portfolio allocations that result from mean-variance optimization and produce stable, optimal portfolios based on an investor’s insights. Using the Black-Litterman mean-variance optimization, the chart above identifies efficient asset mixes that provide the greatest expected return for a given amount of expected risk over a variety of investment horizons. The inputs used are based on Morningstar Investment Management’s capital market assumptions.