How Much of Your Retirement Should be in a self directed IRA?

How Much of Your Retirement Should be in a self directed IRA?

We recently overheard interesting comments about self directed IRAs, which brought to mind a PENSCO Trust article, “How Much of Your Retirement Portfolio Should Be In Alternatives?” by Eileen Loustau.   As an IRA custodian, PENSCO is not in the business of giving investment advice. Paraphrasing the advice implied in the PENSCO article, it was that investors should “invest in what they know” or “prefer.”

Concentrated Bet?

But what if “what you know” is “what you do for a living”? You are essentially concentrating your investments into a sector or area where your wages and employment are at risk. In the event of a sector slowdown in the field you work, this could be disastrous.  Many experts make the same argument against employer stock for 401(k) plans, noting past cases where employees were laid off and the stock in their employer held in their 401(k) fell in value (in some cases becoming worthless). Famous examples of this include Enron, Global Crossing, United Airlines and General Motors.

To avoid investment risk (in your employer’s sector) where you already have career & employment risk, investment professionals advise individuals to diversify. Using that rationale, we come back to “how much of your retirement should be in a self directed IRA”?

Yale or Fail

Legendary Yale investment officer David Swensen has a famous and very successful asset allocation based model portfolio, with investment allocated across the following asset classes:

swensen 1

Self Directed IRA Implication

Okay, so what does David Swensen’s asset allocation theory have to do with my self directed IRA? Since rental real estate is the most common self directed IRA investment, we believe prudent retirement investors holding real estate should consider adjusting Swensen’s Model Portfolio and invest between 10-20% of their total retirement funds in self directed IRA alternatives (like rental real estate properties and private notes).

A model self directed IRA portfolio might look something like this:

swensen sdira


If you hold private company shares or interests, a private equity or hedge fund, then consideration should be given to how that may effect your overall asset allocation. As always, consult an investment and tax professional as you devise an investment strategy suited to your long term goals and risk tolerance.


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