You’ve seen us throw this word around a lot – “diversification.” But what does it mean and, more importantly, how can you include it in your retirement investment strategy? How do Self-Directed IRAs fit in?
It’s such an important concept that we thought we’d tackle it in two parts. First, we’ll define the problem, looking at the reason so many investors are concerned with diversifying their investment types, as well as look at some potential solutions. Then we’ll dig down into the nitty-gritty of diversifying to ensure that you know exactly how you can achieve diversification in your own retirement portfolio using tools like Self-Directed IRAs and real estate investing.
The concept shouldn’t be intimidating, or scary. And it’s not one of those abstract concepts reserved only for the very wealth. It’s a very real concept that every investor should be aware of if they want to ensure that their money is safe and protected…and ultimately there when retirement age hits and you need it the most.
The Problems: When Diversification Isn’t the Name of Your Game
Let’s say you came from a country—we’ll call it Freedomland. And in freedomland, they have a currency called the liberty pound. As a citizen of Freedomland, you hold all of your investments in the liberty pound—you own Freedomland stocks, you hire Freedomland brokers, and all of your funds are Freedomland funds that own Freedomland stocks. You feel diversified.
Then, one day, the value of a liberty pound suffers against, say, the value of gold. Now you realize that inflation is getting the best of you. Were you really diversified all along?
Or, to use a more extreme example, let’s say that in Freedomland, you only owned one stock: ABC Company. All of your pension, your 401(k), your retirement hopes are in ABC Company. Then, one day ABC Company goes bankrupt.
Were you diversified at all?
Diversification is essentially a strategy in which you avoid putting all of your eggs in one basket. And like someone with their eggs in one basket, diversification can lead to some predictable problems when it comes to you retirement plan, problems like:
- If all of your money is in one stock, then that stock’s health becomes your retirement investment’s health. If it goes up, you go up. If it goes down, you go down. There’s no middle ground. That means that your investments will be even more volatile and subject to risk than someone who, say, owns two stocks.
- Putting all of your eggs in one basket is high-risk behavior because if you drop the basket, you have no fallback option. It may sound like a silly analogy, but it’s the same case when you place all of your retirement investments in one case.
Luckily, there are simple ways to ensure that you’re diversified – and one such tool is the Self-Directed IRA, or investing in real estate through a Self-Directed IRA.
The Solutions: How to Approach Diversification in New Ways
Now that you understand the need for diversification, let’s look at some of the traditional ways investors use to approach it:
- Rather than purchasing one stock, you can purchase a fund comprised of different stocks. This means that you’re not really placing all of your eggs in one basket…you’re spreading it out a little more to ensure more stable growth.
- Alternative investments. The stock market in New York isn’t the only stock market in the world. There are international stocks to consider. There are also other investments to consider, which we’ll explore in Part II.
Once you have an idea of what diversification truly looks like, you should be able to look at your own retirement investments and determine whether or not you’re meeting your own standards in this regard. If not, continue on to Part II, where we’ll discuss the action steps you can take to ensure you are diversified.
We think one of the best ways to diversify a portfolio is to secure a Self-Directed IRA for yourself. To learn more about these, and if you have any questions about what this all means, contact us at 866-7500-IRA(472).