Guidance on IRA Diversification

[IRA]

I've heard the IRS requires or did require IRA investments to be diversified, but I can find no guidance. Does anybody know of any?

[Guest mjb]

no because there is no requirement to diversify IRA investments.

[Guest allancoleman]

Although it probably should be , IRA , , when you look at how some people invest in their IRAs .

[IRA]

A person who works at the EBSA for the DOL told me that the IRS told him that the IRS no longer requires diversification. I don't think the DOL guy was fibbing. So there must have been some obscure guidance out there under which the IRS previously required diversification.

Anyone know anything?

[Guest allancoleman]

" mjb " is right , IRA , I have personally been investing in IRAs since the mid 70's and I've never heard of such a thing . Old wives tale from the EBSA for the DOL , I think .

I seriously think you'd be wise to seek investment advice elsewhere than these employees of EBSA for the DOL . Suggest you start with all the major mutual fund companies such as Fidelity , Schwab , Vanguard , or others . They all have excellent web sites you can google and learn about investing the way the rest of the public does it . Good luck figuring it out . I can see you've really gotten off to a start somewhere out left field with these EBSA for the DOL experts .

By the way , IRA , if you follow the archives here from other posters on other questions , you can tell by the language that most are qualified CPAs and such who really know their stuff , UNLIKE myself , who is just an adverage investor who really likes Roths .

[IRA]

This guy has worked for the EBSA since the EBSA was at the IRS, e.g., before the Reorganization Plan of 78. I know it is impossible to prove a negative, but I still think there is something out there.

[Guest mjb]

Why dont you ask your EBSA friend for the citation that he quoted you. If diversification is not required why do you care?

[John G]

The IRS cares about taxes owed and following the rules. They don't ask about how you invest. You can see this for yourself by reading Pub 590 on IRA/Roths which has not even one sentence on how you should invest. Maybe this fellow is trying to steer you away from a narrow investment idea. It is common for people to pick up essentially "urban legends" concerning something and believe very firmly is something that is just not true.

YOU are in charge. Not the IRS. Not your banker, not your broker.... YOU are in charge, its your money and you need to be involved in making investment decisions.

Do not confuse this with a knock on diversification. I have never heard of any time where the IRS has required or commented on how people invest.

I also agree that a lot of folks make huge mistakes in investing because they are ill informed. Some of the big mistakes include:

[1] Chasing last years performance. On study showed that a group of mutual fund investors fell way short of the industry average returns because they kept chasing what was hot. The hotest area (value, market size, country, sector, etc.) is often a the bottom of performance the following year.

[2] Keeping too much money in cash. You don't lose money in cash, or do you? Inflation erodes the value of cash, so if you cash return is meager, you can be "losing" money.

[3] Failure to diversify - to great an emphasis on one stock, often related to pension plans based upon company stock (like Enron). But, if you GOOGLE under NFI (Novistar), you will find articles where folks had placed 50 to 100% of their retirement assets into a sub-prime mortgage company because they paid very high dividends. NFI dropped from $50 to under $8 in the sub-prime meltdown in the past 2 months.

[4] Too conservative a portfolio. If you are investing for decades (and even if you are 50 that might be true because you don't spend all your retirement income the year you retire) you need to have a substantial part of your assets in equities. Folks that don't understand investing often confuse short term volatility with long term performance and shy away from stocks or mutual funds with substantial stock holdings. If you are fearful of having a down year (or overreact to a down year), then you do not know enough about long term investing success. Investment success is long term - years, decades and even generations.

[5] Inadequate time spent learning how to invest. Think about how much time folks spend planning a 1 week vacation, shopping for a big screen TV, or buying a car. How much time do you think people spend reading about how to invest? In my experience, it is not rare to find someone age 45 with a 400K retirement account that spends less than a hour a year thinking about this asset. You don't have to be a full time investor - everyone has a life to lead. But how can you justify spending zero time on learning about investing? I suggest that folks start with committing 2 hours a month to reading a personal finance magazine like Kiplinger. Even 1 hour a month would be a start.

[IRA]

I've also heard law firms say the IRS has in the past had some rule of diversificaation. There must be a source out there. Just because I can't find it doesn't mean it doesn't exist. Again, I know it is impossible to prove a negative.

[Guest allancoleman]

Suggest , IRA , that you NOT waste your time researching whether there was a possible rule for diversification in the past , because it does NOT exist now . It might be better if you spent your time and questions on where and what to invest your money in now .

I would think it would be a much more rewarding positive experience than your attempts to " prove a negative " here on this board that might or might not have existed as a " rule " in the distant past . Just a friendly suggestion .