Self Directed IRA – Diversification Benefits

A Self Directed IRA and other retirement accounts allow you to go far beyond that antiquated asset allocation model and achieve true investment diversification.

You’ve heard it said, “don’t put all your eggs in one basket.” Even two baskets doesn’t work too well. Warren Buffett is a longtime believer in ‘concentrated bets.’ But even his company Berkshire Hathaway normally maintains substantial diversification in many different kinds of companies, industries and investments at any given time. Nevertheless, too many investors still concentrate nearly all their retirement assets in just two asset classes: Stocks and bonds. They take refuge in the illusion of diversification in a 60/40 portfolio. Could a Self Directed IRA be part of their portfolio?

Why You Should Consider A Self Directed IRA

There’s nothing wrong with stocks and bonds, per se. They’ve both been tremendously successful in creating wealth for their owners. In fact, they have been so successful that for current and future buyers, stocks and bonds are victims of their own success: Their success has caused investors to bid up prices so that future expected returns have much less potential than they did a generation ago.


In 1980, interest rates were much, much higher across the board. The average 10-year corporate bond yielded over 11 percent for much of that year. Since then, bond prices have been rising – and yields falling. Today, the 10-year corporate yields between 2 and 3 percent.

Stocks, too, are not generating the same expected yields on earnings – whether those earnings are distributed in dividends or reinvested. Looking at total earnings, the earnings yield on the S&P 500 in 1980 was 13.5 percent. At the end of 2015, the same index sported an earnings yield of just 4.5 percent, according to research by Charles Lewis Sizemore, CFA.

Those are slim pickings indeed – but those asset classes and cash/cash equivalents are the only game in town if you choose a run-of-the-mill investment company to handle your IRA or 401(k) assets.

A Sample Self Directed IRA Portfolio

That’s where Self Directed IRAs come in.

Sizemore recently recommended a portfolio asset allocation for a customer consisting of the following:

  • Dividend growth stocks: 32 percent.
  • Real estate: 14 percent
  • Private equity: 14 percent
  • Preferred Stock: 8 percent
  • Closed-end bonds funds: 7 percent
  • Options writing funds: 7 percent
  • Master limited partnerships: 6 percent
  • Medical accounts receivable: 6 percent
  • Cash: 6 percent.

So instead of owning just two asset classes and some cash, this portfolio would maintain exposure to not less than 9 asset classes (with perhaps some additional levels of diversification within each subgroup, of course).

That enables substantially more diversification, and much less exposure to the risk of collapse in any one sector, industry or even asset class.

The dividends, real estate, preferred stock and bond CEFs, as well as the options writing fund and medical accounts receivable all provided solid yet diverse income sources, while possibly providing a bit of protection against the prospect of rising interest rates.

If the customer is in a high tax bracket, the master limited partnerships can be a very attractive option – and many of them generate cash flow, only a portion of which is taxed as ordinary income. (Note: It doesn’t work the same way in retirement accounts, so check with your financial and tax advisors about your own individual situation and the best way to hold those assets, if you are interested in MLPs and non-traded limited partnerships).

The beauty of self-directing an IRA or other retirement account is this: It liberates you from having to be satisfied with an old-fashioned stocks/bond/cash portfolio, and allows you to seek diversification and superior returns in nearly every segment of the global economy.

AmericanIRA, LLC is a leading expert when it comes to helping our clients diversify their retirement accounts beyond the “Big Three” and seek out potentially greater expected returns through non-traditional retirement account investing.

If you believe you can benefit from better returns and more diversification (and many times, with much lower costs than traditional investment firms charge!) we want to work with you. Call us today for a no-obligation consultation at 866-7500-IRA(472). Or visit our informative website at We look forward to serving you.