Bonds, stocks, and mutual funds are common assets in any portfolio, but focusing solely on these assets can leave you vulnerable to market volatility.

Learning how to diversify portfolio selection can help reduce the risk of market vulnerabilities and put you on a smarter path to retirement. One way to do that is by balancing traditional assets, like those mentioned above, with alternative assets, such as real estate, private equity, and promissory notes.

The Importance of Diversification for Retirement

Diversification is a fundamental way to manage investment risks, especially in retirement. The idea is simple: Don’t rely on a single asset class to build your retirement. Instead, spread investments across a mix of traditional and alternative assets.

Recent research in the Journal of Asset Management (2025) found that portfolios diversified across traditional and alternative assets—such as equities, bonds, commodities, and gold—achieved stronger risk-adjusted performance and lower drawdowns than stock-and-bond-only portfolios.

Some of the reasons that balancing your portfolio with alternative assets include:

• Reducing the risk of significant losses. When one security underperforms, other, unrelated assets can offset downward shifts.
• Smoothing out volatility. A diversified investment portfolio tends to be less erratic, helping you maintain future goals instead of panicking over present shifts.
• Capturing upside across industries and cycles. Asset classes can perform well under different market conditions. Diversification can help you capture wins at various cycles.

For retirement savers with longer time horizons, diversification also enables greater flexibility to take on higher risk in pursuit of long-term growth, as long as the structure can withstand market downturns.

The Secret to Diversification in Retirement Plans: Self-Directing

When you have a traditional retirement plan, like many 401(k)s or IRAs, you generally are limited to stocks, mutual funds, ETFs, and other common assets. This narrows your ability to truly diversify your retirement portfolio, as you won’t have access to less market-dependent assets.

Self-directed accounts give you more freedom and control. Specifically, by choosing the self-directed path, you gain access to:

• Greater control over asset allocation and selection: A self-directed account gives you access to alternative assets such as real estate, private equity, promissory notes, cryptocurrency, and precious metals. By choosing the self-directed approach, you gain:
• Flexibility to adjust based on the level of risk and evolving goals. As the economy shifts or your retirement-based buying power expands, you can tap into new markets and asset classes that can further grow or stabilize your account. A self-directed account can also make adjusting your account to new retirement goals or deadlines easier.
• Ability to balance short-term liquidity with long-term growth opportunities. Maintain liquid investments you can access quickly (like cash or ETFs) while holding assets designed for growth over decades, such as stocks, real estate, or private equity.

By self-directing, you can construct a diversified portfolio that truly reflects your personal risk profile and financial goals.

How to Access Alternative Assets in a Retirement Plan

Adding alternative assets to a retirement portfolio requires the right account structure. Here are some ways to access alternative assets inside a tax-advantaged retirement plan.

1. Choose the Right Type of Self-Directed Account

Before opening an account, you must decide which self-directed structure best fits your retirement strategy. The most common options are self-directed IRAs (Traditional or Roth) and Solo 401(k)s, though some employers offer self-directed 401(k) options. Each offers unique tax advantages, contribution limits, and flexibility for different types of investors.

How: Compare the rules and benefits of each account type. A self-directed IRA may suit investors who want tax-deferred or tax-free growth, while a Solo 401(k) can be ideal for self-employed individuals seeking higher contribution limits. Review your income, employment status, and long-term goals before choosing.

2. Open a Self-Directed Account.

You can only hold alternative assets in a self-directed retirement account. These can include self-directed IRAs and 401(k)s. Self-directed accounts must be opened with IRS-approved custodians; they aren’t commonly available through traditional banking institutions.

How: Research custodians, limiting your search to those IRS-approved to hold self-directed accounts. Also, consider their experience with different asset classes (e.g., real estate, commodities, private equity, etc.) and their free structure.

3. Fund Your Self-Directed Account

Once your self-directed IRA or 401(k) is open, you must move money into it before making investments. This usually happens through a rollover from an existing retirement account, a transfer between custodians, or a new annual contribution. Each option has its own tax considerations, so it’s essential to follow IRS guidelines carefully.

How: Work with your custodian to complete the proper rollover or transfer paperwork. Double-check contribution limits if you’re adding new funds, and keep records of all transactions for compliance purposes.

4. Choose Assets

After funding your account, you can select the alternative assets you want to hold. Options often include real estate, private equity, precious metals, or cryptocurrency, assets not typically available in traditional retirement plans.

How: Start by clarifying your investment goals and risk tolerance. Then, research each asset class carefully, focusing on potential returns, liquidity, and IRS rules. Work with your custodian to confirm your chosen assets are eligible and adequately documented.

Alternative Assets to Diversify Your Portfolio

A key part of diversifying and scaling your portfolio is choosing the right assets you are familiar with.

1. Real Estate

Real estate provides steady rental income and long-term growth potential. Investors can purchase rental homes, commercial properties, or invest in REITs. While real estate requires management and market knowledge, it offers tangible value and potential tax benefits, making it a reliable diversification tool for retirement portfolios.

2. Cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum add high-growth potential to a portfolio. They’re accessible through IRS-approved custodians in self-directed accounts. Though volatile and risky, crypto can provide liquidity and exposure to innovative markets. Investors who understand blockchain and accept market swings may benefit from its unique diversification advantages.

3. Precious Metals

Gold, silver, and platinum offer a hedge against inflation and economic downturns. Precious metals don’t generate income but provide tangible value and stability when markets fluctuate. Holding them in a self-directed account helps preserve purchasing power, balance risk, and add diversification beyond traditional stocks and bonds.

4. Private Equity

Private equity investments allow you to fund startups or private businesses. Though less liquid and riskier than public markets, they can yield strong long-term returns. Success depends on business growth and management. For investors seeking higher rewards, private equity brings opportunity and diversification within a retirement portfolio.

5. Promissory Notes

Promissory notes let you lend money to individuals or businesses for fixed interest payments. They offer predictable income but vary in risk depending on collateral and borrower reliability. With proper due diligence, they provide passive income and flexibility, making them an attractive diversification option for self-directed investors.

Why Standard Retirement Plans Aren’t Truly Diversified

Most traditional retirement plans focus on stocks, bonds, and mutual funds. While these assets are familiar, they often move in the same cycles. That means when the market dips, the bulk of your portfolio can drop as well. Traditional accounts also don’t allow investors to hold alternative assets, which limits diversification.

True diversification comes from adding assets that behave differently, such as real estate, precious metals, or private investments. By expanding beyond the standard mix, investors can balance risk, protect wealth, and pursue more resilient long-term growth.

FAQ

How often should I rebalance my portfolio?

Review your portfolio once or twice a year to ensure your asset mix aligns with your goals. Market movements can shift your allocations over time, leaving you vulnerable to underperforming areas while leaving dollars on the table in sectors that may be underinvested.

Rebalancing helps restore your original investment strategy and manage risk. If your portfolio includes alternative assets, review those quarterly or after major market changes to stay on track.

Can I be too diversified?

Yes. Diversification lowers risk, but owning too many similar assets can dilute your returns. Overlapping investments often move in the same direction, which limits your portfolio’s potential. Instead, choose a mix of assets that behave differently in changing markets, such as stocks, bonds, real estate, and private equity.

The goal is balance: enough variety to protect against loss without slowing your long-term growth.

What role does risk play in diversification?

Your risk tolerance determines how aggressive or conservative your portfolio should be. Investors with higher risk tolerance may hold more growth-oriented or volatile assets, while conservative investors may prefer stable, income-producing options.

Understanding your comfort with short-term losses helps shape how much of your portfolio goes into higher-risk versus lower-risk investments. Diversification works best when it reflects both your goals and your ability to handle risk.