An individual retirement account (IRA) provides individuals with the ability to select amongst a wide variety of investment types in a way that allows them to truly diversify their retirement assets. IRAs differ significantly from 401k or 403b plans in the number of options available to them for investment and in the ability to avoid many of the fees that are inherit in mutual funds and other investment vehicles common in those plans.
While IRAs offer investors with the ability to diversify their investments, more often than not investors tend to only invest in a limited number of different investment types such as bonds or common stocks. This defeats the purpose of diversification and does not approach the investment concept of alpha. When investing, the concept of alpha is best described in an example. A portfolio that approaches alpha is a diversified portfolio that is immune to market risk. In other words an investment account that approaches alpha would maintain a steady balance upon a market crash by some investments increasing in value while others decrease, leaving your portfolio unaffected. Many investors do not reduce market risk by choosing truly diversified asset classes. In other words, when an investment decreases in your portfolio, all of your assets decrease in concert with one another.
A lack of investment diversification is most evident when a market crashes. Up until a crash, some investments may go up as others go down as industry groups rise or fall in favor with investors. During a market crash, all equities and bonds often drop in accordance with one another and the diversification obtained by owning mutual funds and a varied portfolio of stocks does not add diversification to your portfolio. One investment type is not strongly correlated to other asset groups and provides for true diversification. That investment group is gold.
Benefits of Investing in Gold in Your IRA
Gold does not typically trade in concert with other assets as it is an alternative to paper currencies and due to the limited supply of gold available to traders. Since there is a limited supply of gold but an infinite supply of paper currencies, gold tends to increase in value during inflationary times and provides for the long term protection against inflation. Further, gold is inversely correlated with equities and often increases when stocks decrease and vice versa. This provides your portfolio with true diversification. The inflationary and diversification benefits are particularly important in an retirement account such as an IRA which typically has many years to mature and may be subject to inflationary risks due to the long duration that the IRA will be in existence. Further, gold investments in your IRA provide for true diversification and, with the long term power of inflation, will often limit your losses during market crashes and aide your recovery once you rebalance your portfolio after a crash.
Due to these benefits, gold makes for an excellent investment option for your IRA. While many professionals recommend 5-10% of your portfolio should be in gold, it is important to decide on your own portfolio components by deciding if there are any current opportunities in gold based upon pricing, and allocate your IRA accordingly.