How do I diversify my traditional IRA? This is one of the questions that you may have already asked yourself as an investor who has come face to face with the economic crisis menace. Anyone who has had their investment affected by the market forces knows that without a proper investment strategy, which includes the diversification of one’s portfolio, it is easy for one to end up poor. This is why today we shall highlight some of the things that one ought to do if they wish to diversify their traditional IRA in the right way.
One of the best things about an IRA is that is offers more options, in comparison to a workplace retirement plan. An investor can access a larger selection of assets to invest, and hope for the best outcome as time goes by. A traditional IRA may not offer as many opportunities as the self-directed IRA, but it can at least get you started on a path to a stable financial future in your retirement years.
As you embark on the journey to creating wealth through a traditional IRA, there are a couple of strategies that you will need to implement so that you can shield your assets from being beaten to a pulp during all types of global economic crises. The main ones include:
Have a clear understanding of asset allocation
I know the words asset allocation sound a bit complicated by that is far from the case. This simply points to how your funds are divided amongst the different types of investments. For most people, the main assets that are considered are stocks, bonds, and cash. After deciding that you will invest in stocks or bonds, for instance, you can diversify as follows:
- Large-cap stocks and small-cap stocks
- Corporate bonds and municipal bonds.
Let’s say you have set aside $10,000 to invest in an IRA, you can allocate about $7000 to stocks, and $3000 to bonds. This is bearing in mind that stocks come with greater risks but greater returns, whereas bonds come with less risk and fewer rewards. Doing this will help balance out your portfolio in a manner that will leave you relatively safe in comparison to instances in which you would only have stocks or bonds exclusively.
Consider your risk tolerance
Diversification takes into account several things, including:
- The time horizon
- The amount of money to be invested
- One’s ability to tolerate risk.
Risk tolerance is all about knowing how much risk you are willing to shoulder so that the money in your IRA can grow, without you necessarily making very huge losses if the market forces work against you.
There are a couple of approaches you can bank on, including the one in which you subtract your age from 100. The number you get after doing the subtraction is the percentage of your retirement investment portfolio that should be allocated towards stocks. For instance, if you’re 40 years old, you should only allocate 60% to stocks ( 60% to 70%). You may want to distribute your funds otherwise, but generally, this is one rule that can guide you on how to get started.
The age factor comes in because you can stomach more risk if you’re younger, and even readjust if things do not go your way. Not to mean that if you’re a senior you should not invest in stocks, but it would be a good thing to consider also investing in assets such as gold ( by opening a gold IRA) if you have a low-risk tolerance. This way, even if the market decides to take a dive, you will not be forced to sell low to minimize the risk of going broke.
Utilize mutual funds for the base of your retirement investment portfolio
You may be tempted to fill your traditional IRA with specific stocks and bonds, but this will prove to be a poor approach, more so if you are not a professional investor. It is better to diversify your assets as you wait for long-term growth and realize better results from your portfolio that also comprises exchange-traded funds ( ETFs) or mutual funds.
Most investors prefer Index funds and ETFs since they present them with the opportunity to purchase a basket of assets as opposed to stocks offered by one company. With an S&P fund, for instance, you can invest in several of the largest firms in the USA- this is classified as a large-capitalization (large cap) fund for this reason.
If you diversify your portfolio using index funds, you will need to allocate more of your equity to the bigger asset classes, e.g. to the large-cap funds, as opposed to the small-cap and mid-cap funds. You can then allocate the lesser amount of money to either the small-cap or mid-cap funds.
Fund screeners come in handy during the selection of ETFs that meet one’s preferences. You can get this tool from an online broker ( check out Yahoo or Morningstar as well). With the fund screener, you can sort out the preferred funds by:
- Expense ratio
- Fund type
- Other market-related factors
If you have some great confidence level, however, you can forget such funds and simply create your own portfolio comprising individual stocks and bonds. The truth of the matter, however, is that this is a full-time job that calls for extensive research, quality planning, and undivided attention to your investment portfolio. If you are willing and capable of putting in the right amount of effort ( and time), it may pay off handsomely.
Know when to call in the experts
Depending on what you want to achieve financially as you get to your retirement years, you may have to avoid all the trial and error scenarios, and simply call in professional investors to help you figure it out. You can use target funds or robo-advisors to achieve this. Before I even get to the depth of this, I must state that profitability is not always guaranteed even with the use of expert advice. The best you can do is speculate and hope that things will turn out well. Of course, there is a greater chance of success if you rely on a prudent investment expert, but it all comes down to your decisions.
Talking of decisions, I think you might want to consider opening your self-directed IRA since it gives you more power to decide how to allocate your funds to different assets (even the alternative assets).
Thank you for making it to the end of the article that has answered the question “ how do I diversify my traditional IRA”. I hope it was educational and that you now know what to do about the matter. I would highly recommend that you consider the recommended IRAs since they offer greater opportunities for diversification of any person’s portfolio.
I wish you well,
Eric, Investor and Team Member at Gold Retired!