What is Diversification? Building a Resilient Retirement Portfolio with Traditional and Alternative Assets

What does it mean to have a truly diversified IRA?

Many financial professionals explain diversification as varying the types of stocks in a retirement account or holding a combination of stocks and bonds. But this investment strategy limits the investor to traditional investments and doesn’t offer much risk diversification.

Many investors don’t have a diverse blend of traditional and alternative investments in their retirement account because they don’t realize they can do so. Some well-known IRA custodians such as Schwab and Fidelity may only offer the ability to invest in traditional assets, leaving investors unaware of all the possibilities for their retirement account.

Other custodians, known as self-directed IRA custodians, enable you to truly diversify your retirement account with traditional and alternative assets. The investment possibilities are extensive (the IRS provides only a small list of investments not allowed in an IRA – see Publication 590 for details), allowing for a potentially diverse mix of assets.

For example, a diversified portfolio at a custodian such as Equity Trust could have a mix of public and private assets. The account could include stocks, real estate, notes, and crypto – all in one IRA.

Related webinar: Is your IRA Truly Diversified?

Considerations when diversifying your portfolio

Every investor is different, and you should always consult with a financial professional before investing to determine what’s right for you. When considering how diversification could look for you, here are some things to keep in mind:

Do:

1. Know your risk tolerance: Consider factors such as your age, investment timeline, financial goals, and emotional ability to handle market fluctuations. Assessing your risk tolerance helps you determine the appropriate mix of traditional and alternative investments that aligns with your comfort level and financial objectives.
2. Invest in your passions: Whether it’s real estate or a specific industry, investing in something you understand and are passionate about can make the investment process more engaging and potentially more rewarding. However, it’s essential to balance passion with objective financial analysis to ensure sound investment decisions.
3. Use a qualified custodian: It is required that IRAs are held at a custodial entity such as a bank, trust company or entity licensed and regulated as a “non-bank custodian,” according to the IRS. When investing in alternative assets, it’s crucial to use a qualified custodian that specializes in holding and administering these types of investments. Unlike traditional investments, not all custodians are equipped to handle alternative assets. Custodians like Equity Trust have the necessary experience, infrastructure, and regulatory compliance in place to hold alternative investments, providing peace of mind and ensuring proper record-keeping and reporting.

Don’t:

1. Put all your eggs in one basket: Avoid concentrating your entire retirement portfolio in a single investment or asset class, whether traditional or alternative, according to the Financial Industry Regulatory Authority (FINRA). Diversification is key to managing risk and potentially optimizing returns. Spread your investments across different asset classes, sectors, and geographic regions to minimize the impact of any single investment’s performance on your overall portfolio.
2. Invest based on emotions: Emotional decision-making can be detrimental to your investment strategy. Avoid making impulsive investment choices based on fear, greed, or market hype. Stick to your well-researched and carefully planned investment approach, and base your decisions on objective financial analysis rather than short-term emotions. It’s essential to maintain a long-term perspective and avoid reactionary buying or selling based on temporary market fluctuations.
3. Wait to get started: Don’t procrastinate when it comes to diversifying your retirement portfolio. The earlier you start investing and diversifying, the more time your investments have to potentially grow and compound. Delaying the implementation of your diversification strategy can limit your ability to take advantage of long-term investment opportunities and may require more aggressive investing later to catch up.

Learn more about diversifying your IRA

Now that you know more about true diversification, learn about some of the potential options for diversifying your retirement account.

Video: What is Diversification?

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Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Equity Trust is not a fiduciary and does not endorse, recommend, or opine on suitability of any specific asset class or investment. Investing involves risk, including possible loss of principal. Whenever making an investment decision, please consult with your tax attorney or financial professional.