Financial planners, retirement educators, fund managers and the like love talking about diversification. We at Accuplan are no stranger to the diversification debate and in fact we like to sound our horn just like all the other financial planners who tout that you need to diversify your investments and retirement investments. We thought no perfect time to sound our horn than this holiday season and remind you of why it is important to diversify your retirement investments. Whether your retirement investments are diversified already or not it is super important to realize why you should diversify your account. After I explain why it is important I'll give you a few tips to consider when diversifying your retirement accounts.
No matter what we are invested in when we see that the indexes are on the rise most of us wish that we had a portfolio heavily weighted in equities. On the other hand when we see that the indexes on on their way down we wish that our portfolio was weighted heavily in bonds or other markets that tend to go up when the indexes are on their way down. The point here is that because we cannot time the market the next best scenario is to diversify. Diversifying makes it so that when certain markets drop we have enough eggs in other baskets to be able to weather the storm. While everyone wishes they could honestly time the market, you just never know and that is why diversifying is key and here are a few tips to help you diversify your retirement portfolio.
Put Your Eggs In Multiple Baskets
Of course we all love equities because of their great upside but you shouldn't put all of your investments into one stock or sector. As an old rule of thumb one way to know how much of your portfolio should be in stocks is to have your percent be 100 minus your age. That would give you the percent of stocks for your portfolio. I actually like a bit more aggressive stance on this and look for the 110 minus your age to give you the percent of stocks for your portfolio.
Spreading your eggs around into multiple baskets is the biggest and most important part to diversifying. There are some who would suggest you invest in what you know or companies that you trust and maybe even use in your every day life. This can really benefit you but I think that it is quite risky. I tend to like to stay away from risk. Doing the things that are going to limit the most amount of risk without limiting the upside is what I like to look at. This could mean investing in certain index funds or fixed-income. If you invest in securities that track various indexes then you are set quite well for long-term diversification. The fixed-income will help hedge against market volatility and uncertainty.
It is also very wise to have baskets that are completely outside of "paper" assets (stocks, bonds, etc.) Investing in tangible things with your retirement is also a very good strategy. The perfect example of an investment would be real estate. Investing in a rental property is a great way to further hedge against market volatility.
Many don't know that you can purchase real estate with your retirement accounts. Most people who have retirement accounts only think about the typically stocks and bonds for retirement investing. Don't be pigeon holed into thinking you have to have it all just in stocks and bonds. You can invest with your retirement account into tangible assets like gold and real estate. You can also invest it into private placements. You have so many options and investing in these tangible assets helps to really diversify your retirement account more fully. It is very easy to do, through a self-directed IRA. The issue that most have when trying to buy real estate or another tangible asset with their IRA or 401k is that their investment firm (Fidelity, Merrill Lynch, etc) won't allow them to do this. The main reason they don't allow it is because they make more money by having you invest in other things like mutual funds, etc. If your current investment firm doesn't allow this then you simply need to open a self-directed IRA with a firm who will allow for self-directed IRAs. That way you can invest a portion of your IRA or 401k money into real tangible investments. Yet again, another way to truly diversify your retirement portfolio, thus creating the best portfolio for you.
Beyond making sure you have the right investments the next best thing you can do is to regularly invest more money into those investment. The best reason to continue to invest over time rather than a lump some at once is because it is very hard to time the market and investing over time will smooth out the peaks and valleys that market volatility creates. This strategy is called dollar-cost-averaging. For example, if you have 12,000 to invest, invest that 12,000 over the span of a year instead of all at once.
These are two of the biggest and most important things you can do for your retirement accounts, no matter if it be your IRA or 401k. Make sure to truly diversify your retirement accounts with a self-directed IRA as you'll limit your risk and when it comes to your retirement you want to limit your risk while still having a great return.
If you want more information about diversifying your IRA or 401k with a self-directed IRA contact us as we are self-directed IRA professionals.
Author: Nick Barker