Why Mutual Funds May Not Actually Be A Truly Diversified Investment Position After All

The Half-Truths of Mutual Fund Diversification

According to, a mutual fund is defined as an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Truly diversify beyond mutual funds.


Is Your Mutual Fund Covered By Fire Insurance In The Event of a Fire Sale or Massive Stock Sell-Off?

Many brokers will make the case that a mutual fund allows you to diversify your retirement account because the money is put into an assortment of stocks, bonds, and other money market instruments. However, this is only half-true.

Although you are investing your money into many different types of publicly traded securities, they are all still influenced by the volatility of the stock market.  If one or two stocks in your mutual fund are underperforming, they can often be made up for by other assets in the mutual fund. However, if the entire stock market is doing poorly, then the value of your mutual fund will suffer.

Is your mutual fund insured to make up for the losses in the event this happens? Of course, it isn’t!

One of the pros to investing with a self directed real estate IRA is if the property or asset you purchase burns to the ground, it should be insured. However, the same is not true if there is a fire sale and your stock or mutual fund goes to zero. I am not saying one asset is better than the other. I am just making the point. There is power in true diversity not only in the stock market but also outside of the market too.

What True Investment Diversity Looks Like

The way to truly diversify your retirement account is a self directed IRA account. This type of IRA allows you to manage your money and invest in assets traditional brokerage houses typically will not allow. Most stock brokers make commissions for selling you individual stocks, bonds, and mutual funds. Therefore, it’s neither in their best financial interest to make your aware or allow you to invest in something like real estate, although it is an eligible asset for your IRA because they would not make a commission for recommending properties for your IRA.

A Self Directed IRA with Sunwest Trust Will Save You In Administrative Fees

With a self-directed IRA, depending on the custodian you select, you are typically charged a flat-fee instead of paying a percentage or asset fee based on your asset value or paying commissions based on what you purchase.

At Sunwest Trust, we will allow you to invest your IRA in any asset explicitly not prohibited by the IRS. For example, the IRS prohibits expressly are life insurance and collectibles, so investing in prohibited assets is a no-no.

Another IRA rule does not allow you to make any investments with disqualified parties such as with your non-IRA funds, your spouse, and other lineal family members. For a list of excluded individuals, make sure to check out our blog articles on prohibited transactions and disqualified parties.

As long as you follow a few IRS rules regarding self directed IRAs, you are free to invest your self directed IRA, truly diversify and parlay your retirement savings not only in traditional investments like stocks, bonds, and mutual funds but also into alternative tangible assets such as physical gold, oil and gas, and real estate. For a list of allowable IRA assets, stay tuned for more blog posts.

There are advantages and disadvantages to investing with a self directed IRA. It depends on your investment objectives, which is why is it is important to be diversified and not have your nest egg all in one basket.

By the way, we are often asked whether it is possible to invest in stocks or the stock market with a Sunwest IRA account. If you are curious about the answer, check out our video.

Are you interested in opening an account with Sunwest Trust?  View our fee schedule.