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Self-directed IRA: How to diversify and grow your retirement portfolio

Understanding Self-directed IRA

“The beauty of diversification is it's about as close as you can get to a free lunch in investing.” Barry Ritholtz

How do you feel about staking your entire future on the stock market? Risky, right! Who would do that? Surprisingly enough, a lot of investors are putting their money in the stock market directly or indirectly. If you rather invested in bonds to minimize the risk, you’re unlikely to gain the returns necessary to fund your retirement. That along with the changing federal interest rates makes bonds an unattractive investment option. So, how do you invest for retirement while minimizing your risk and still pocketing handsome returns? Investing in alternative assets with a self-directed IRA is an option to look into.

Why invest in alternative assets?

The alternative investment strategies have helped smart investors gain competitive returns over the years. Here are some reasons to add them to your portfolio:

  • True diversification & security: Investing in alternative assets allows you to achieve true diversification. You can minimize your risk profile by choosing different alternative asset classes. Real estate, precious metals, mortgage notes, tax liens, private equity, and real estate investment trusts (REITs).
  • Competitive returns: Unlike security bonds, you can earn better returns by investing in alternative assets. If you’re a realtor, imagine the sort of returns you can achieve by using your expertise and industry knowledge.

For an average investor, investing in alternative assets might pose some challenges, especially in choosing assets classes that can achieve your retirement goals. It’s best to seek professional help and make sound financial decisions.

What is a self-directed IRA?

Since you are investing for retirement, you’ll require a retirement tool that can invest in alternative assets with minimal custodial red tape around it.

Self-directed IRA comes into picture.

A self-directed IRA is a retirement solution that offers investment discretion/control to the plan owner. Depending upon your plan custodian, you can access most of the asset classes discussed above. Some of the popular self-directed retirement options include self-directed IRAs, Solo 401k plans, and 401k plans.

What are your investment options through a self-directed IRA?

  • Real estate: The IRS allows real estate investing within retirement accounts. The trick is that it is not mandatory for financial institutions to offer it as an asset class. However, with a self-directed IRA, you can invest in real estate starting with residential, commercial, and third-party real estate LLC investments
  • Private equity: If you have experience in business, you can use your retirement accounts to purchase private equity. While it is an exciting proposition, make sure to test the basics of the company and take professional advice.
  • Mortgage notes/tax liens: If you’re looking for passive growth/returns, mortgage notes, and tax liens are the perfect additions to your portfolio. You don’t have to fret about property maintenance and utility bills.
  • Precious metals: Gold and most of the precious metals are cyclical. They allow investors to hedge their investments against inflation, stock market movements and any financial fiasco.
  • Stock, bonds, mutual funds: Self-directed IRAs allow you to put your money in traditional investment options, including stocks, bonds, and mutual funds. With a self-directed IRA, you as the account owner can initiate transactions without going through custodians. This also minimizes transaction costs and fees. In order to retire with sufficient money, create a balanced portfolio and restructure it routinely.

Who should choose self-directed retirement accounts?

The financial goals of every individual vary and so does their investing strategies. If you have a limited understanding of the investment realm, you may want to use a professional’s help. A self-directed IRA is good for you if you are:

  • Ready to take control of your retirement account.
  • Tired of having brokers handle your money.
  • Wanting to diversify your investments
  • Tired of paying high custodian fees and transaction costs.

It is your retirement at stake, so take your time and make the right choice!

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