October 18, 2022

The Secret to a Delicious Apple Pie and a Well-Diversified Retirement Portfolio

Delicious, warm apple pie made with a variety of apples with a piece missing.

Key Points 

  • A well-diversified retirement portfolio can reduce portfolio risk.

  • Diversification can be achieved by investing in a mix of standard assets and alternative assets.

  • A Self-Directed IRA gives you the freedom to invest in alternative assets to create a well- diversified retirement portfolio.

Summer has quickly come to an end, and we are welcoming Autumn with open arms. The season of cozy movie nights, flannels, hayrides, and, of course, baking! Some of the most delicious desserts are in season, like apple pie. Some orchards even allow you to pick from a vast selection of fresh apples to add to your recipe. Luckily, it is said that the best pies are made with a variety of apples! 

Similarly, when investing for retirement, a well-diversified portfolio is desired in order to reduce portfolio risk. Diversification is most often achieved by investing in different asset classes such as standard assets (stocks, bonds, and mutual funds) and alternative assets (real estate, precious metals, start-ups, and more). Let’s explore how diversifying your portfolio is like making a delicious apple pie. 

How Diversifying Your Retirement Portfolio with a Self-Directed IRA is Like Making a Delicious Apple Pie

1. Prepare your Pie Filling with a Variety of Apples / Invest in Multiple Asset Classes in Your Retirement Portfolio

When preparing your pie, consider the types of apples you would like to include. Likewise, when creating a well-diversified retirement portfolio, consider the mix of assets that will be most beneficial.

Investor holding a smart phone with a 3D image of a house for sale, indicating a real estate investment option.

First, you may consider starting with an apple you know will be tasty and sweet, such as a Golden Delicious. In your investment portfolio, this can be an asset with a steady return and reliable income stream such as real estate.

Next, consider adding an apple that is common but flavorful, like the tartness of a Granny Smith. Similarly, standard assets (stocks, bonds, and mutual funds) are popular among many investors and generate profit when the market performs well. 

Your pie may also benefit from an apple that is both sweet and tart, such as a Pink Lady. In your financial portfolio this is comparable to an asset that balances the volatility of the market, such as precious metals. Gold typically has an inverse relationship with the stock market, meaning when the stock prices decrease, gold value increases (and vice versa), making it a good hedge against inflation.  

Lastly, adding something rare to the mix like a Golden Russet apple can give your pie the extra flavor that others are missing. Similarly, assets like raw land, commodities, or a start-up may be just what your retirement portfolio needs to maximize profits. 

While it’s important to include a variety of apples, it’s also crucial to ensure they have the same texture. The ideal mix will have a variety of crisp apples that bake at the same speed. This relates directly to your portfolio since you want to invest in a variety of assets, but ensure they fit within your risk tolerance and investment strategy. 

Wicker baskets holding different apples such as Granny Smith, Red Delicious, and Golden Delicious Apples.
A Well-Diversified Investment Portfolio Infographic with different colored apples to display a variety of assets you can invest in with a Self-Directed IRA such as real estate, standard assets (stocks, bonds, and mutual funds), private businesses/startup-ups, precious metals, and more.

2. Add Your Apple Mix to a Pie Crust / Create a Tax-Advantaged Retirement Account

After choosing the types of apples to use in your pie, it’s time to mix them with some sugar, cinnamon, nutmeg, and put them in a pie crust. In a like manner, once you select the assets to add to your portfolio, you can start investing in them with retirement funds.  

There are different types of retirement accounts you can utilize such as a 401(k), Solo 401(k), IRA, and Self-Directed IRA. Typically, brokerage accounts do not allow you to invest in alternative assets. To truly diversify your portfolio with assets like real estate and precious metals, open a Self-Directed IRA.

3. Let Others Taste Your Pie / Speak with a Financial Advisor about your Retirement Investment Strategy

Before putting your pie in the oven, you may consider asking a friend or family member to try your mix. How does it taste? Is it missing anything? Is it ready to bake?  

Investor woman speaking with a financial advisor about her investment strategy and shaking his hand.

Similarly, before you start investing, it’s recommended to consult a financial adviser and tax adviser to make sure the assets align with your investment strategy and risk tolerance. Decide together what investments will help you meet and even exceed your financial goals.

4. Bake it! / Let Your Retirement Investments Ride (Avoid Taking Early Distributions)

Once your funds are in your retirement account, it's best to let them sit and grow until retirement. If you take out your funds early (before age 59 ½) you will have to pay applicable taxes and penalties. In addition, keep in mind the market fluctuates. Do not allow the market’s volatility to cause you to make any rash decisions. A balanced portfolio will allow you to make it out on top. 

5. Enjoy Your Pie! / Enjoy Your Retirement!

Ding! The oven alerts you that your delicious pie is ready.  

Knowing that your finances are in order, you can retire and enjoy the fruits of your labor. 

6. Pass the Recipe / Retirement Wealth to Your Heirs

Consider how you can share your wealth with your loved ones, whether that be passing on an apple pie recipe or retirement funds. 

Likewise, if you have a Roth IRA (opposed to a Traditional IRA, SEP IRA, and SIMPLE IRA), you do not have to take required minimum distributions (RMDs) during your retirement. You can pass more of your retirement funds down to your heirs!

Happy Grandfather and Grandson sitting on a couch, reading a book, and laughing.

Conclusion: Let’s Put It All Together

Just like adding a variety of apples to create a delicious apple pie, investing in multiple asset classes will help you achieve a well-diversified retirement portfolio. The more diversified your portfolio, the more likely you can hedge against the volatile stock market.  

The Self-Directed IRA is the perfect account to achieve a truly diversified portfolio since it allows accountholders to invest in assets they believe in with retirement funds. Although it may not seem like it at first, diversifying your retirement portfolio and achieving the retirement of your dreams can be as easy as pie. 

Do you want to learn more about diversifying your portfolio with alternative assets? Speak with a Self-Directed IRA Specialist to get your questions answered.  

Disclaimer: Madison Trust Company does not provide legal, tax or investment advice. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.


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