Do I Have to Diversify My IRA?

Diversification

The basic idea behind diversifying your IRA is that you can spread your investment money over several kinds of investments. Diversifying your investments gives you a better chance to overcome economic problems in a particular country or market. For example, if one section of the market declines in value rapidly, you'll still have some of your money invested in other securities, maintaining your portfolio's value.

One way that you can diversify is to put your money into various asset classes. An asset class is a type of investment. For example, stocks are an asset class, and bonds are another asset class. Putting money into numerous asset classes is generally a wise decision in case one market performs poorly compared to another market. In many cases, the stock market performed poorly while the bond market remained steady.

Besides diversifying your investment across asset classes, you also can diversify within a particular asset class. For example, when you invest in stocks, you can invest that portion of your IRA portfolio into several companies. You can split your investment into different sectors of the market, such as technology and transportation. If a particular area of the stock market performs poorly, you still have other stocks to keep your average returns higher than they may be otherwise.

When you choose the investments for your IRA, you can be creative because the investment options are virtually limitless. You do not have to keep your money in only stocks and bonds. You could put some of your money into mutual funds, some into commodities and some into precious metals. Some IRAs even allow you to put money into real estate investments. The Internal Revenue Service only prohibits investing in collectibles, life insurance and personal dealings that benefit you in ways other than your IRA.