What is your desired asset allocation? Do you have an Investment Policy Statement written up? (http://www.bogleheads.org/wiki/Investment_policy_statement)
Do you want to hold real estate?
It sounds to me that you didn't particularly want to hold real estate. You instead made the decision to buy FRESX based on past performance.
You should decide on whether you actually want to hold real estate for the long term in your portfolio, but do not let the poor recent performance of FRESX influence your decision. Unfortunately the latter part is essentially impossible. But it's important to try and do - do you believe that real estate in the long run is a good diversifier and gives you a return/risk ratio that you want? Or would you rather just stick with stocks?
I guess you're right, holding real estate was also a factor. I was concerned about putting everything in one place, so attempting to diversify, and interested in owning real estate without the hassles of owning real estate. I don't really understand why this fund is going down the drain while my neighborhood becomes more unaffordable with every passing week, but I thought real estate was a pretty sound investment and now I just feel confused.
I am positive that the second I sell, this fund will start going back up. Murphy's Law! I'm trying really hard not to let the recent performance influence my decision, but it's getting harder and harder when everytime I check up on it (not daily by the way, trying hard not to even look every week) it's further and further down.
Ah so you do want to hold real estate. Unfortunately I don't have an answer for you as to why the fund is doing poorly. But I can say that your neighborhood becoming more expensive to live in every week has almost no effect on this fund. FRESX is diversified against real estate markets across the United States. Your neighborhood is barely a blip on the radar.
That being said, I think you should consider selling this fund
in favor of a cheaper real estate fund, such as Vanguard's REIT index (VGSIX). It has a expense ratio of 0.26% whereas FRESX has an expense ratio of 0.8%. And many 401k's charge an additional fee on top of the underlying fund's fee so the expense is probably higher than that.
Now of course you may (probably) not have VGSIX available in your 401k. I'd try to get it in an IRA instead (don't hold VGSIX in a taxable, the dividends are mostly if not 100% non-qualified dividends, which do not get the favorable tax treatment that qualified dividends do). If you can't get it in an IRA for whatever reason (you don't have enough space in there to meet the $3k minimum, you don't have an IRA, etc.) then honestly I would seriously consider not holding real estate at all. An underlying fund expense ratio of 0.8% is really high. Assuming that VGSIX and FRESX get the same returns (not true of course but let's just assume), then over 30 years the difference in the final balance is 17.7%. Over 50 years, the difference is 31.2%
Also, I would do your own research as to whether real estate is a good diversifier. My admittedly primitive research into the matter concluded it did not. But definitely do not take my word for it.