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Five Key Attributes Of A Successful Self-Directed IRA Investor

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Flexibility is one of the hallmark benefits of self-directed IRAs – but it can also be a double-edged sword. In the hands of an inexperienced or misinformed investor, the extended range of options under a self-directed IRA can sometimes lead to financial trouble.

But for a certain class of investor with the right mindset, the flexibility offered by a self-directed IRA can prove to be an invaluable retirement resource for growing retirement savings.

Here are five key attributes of a successful self-directed IRA investor.

1. Investment expertise

A self-directed IRA allows you to invest in what you know. Investments such as real estate, privately held companies and promissory notes can sometimes earn higher returns than traditional investments in stocks, bonds, mutual funds and ETFs but may be illiquid and offer higher risk. When self-directing IRA investments, it is crucial that the investor have the necessary expertise to make informed decisions about the targeted investment.

2. Follows the rules

In order to maintain an IRS-compliant self-directed IRA, you must be aware of extra rules that apply when investing in non-traded alternative investments.  For example, you are not allowed to use a self-directed IRA to purchase a piece of real estate you already own; you can’t borrow money from the IRA as a down payment and you can’t use IRA funds to invest in a company where you have a 50% or more ownership interest.  If you decide to self-direct your IRA investing in alternatives, you should be prepared to pay close attention to identified prohibited transactions with disqualified persons.   The IRS does not take ignorance as an excuse and if you break the rules you could be facing a full distribution of the IRA, taxes and penalties.

3. Knows that investing takes work

When you choose to self-direct you and you alone are responsible for your investment choices.  It takes time and effort to learn the rules, identify the right investment, consult with trusted advisors, perform due diligence on the investment and principals involved in the offering and select the right service providers for administering the assets in your self-directed IRA.

 4. Desire for portfolio diversification

 Some people are happy with a simple investment strategy that focuses on stocks, bonds, mutual funds and ETFs – and that is perfectly fine. Self-directed IRA investors seek further portfolio diversification in an effort to offset the extreme ups and downs of the markets. For experienced investors, self-directed IRAs allow them to expand beyond traditional markets and add unique investments to their retirement portfolios in a tax advantaged manner.

 5. Risk tolerance

Investing always carries some degree of risk. Some alternative assets under a self-directed IRA plan are particularly risky, meaning they have a higher chance of a short-term loss than traditional assets. For example, large companies like Apple and Exxon are unlikely to go bankrupt in the next year – so your stock investment should be safe – but a brand-new business partnership (which you can invest with through a self-directed IRA) might not fare so well.

In the long-run, this extra risk can potentially earn higher returns than traditional investments. If the business partnership in your hypothetical example above succeeds, then you would receive a much larger share of the profits than what you could ever earn as an Apple investor. But taking those long-term gambles requires a strong stomach tolerant of short-term risk, otherwise you risk making emotional decisions that deter long-term investment strategies.

A self-directed IRA is not for everyone, but the benefits can be rewarding. Read more about following IRS rules here.

Feeling Stuck In Your Retirement Plan? Diversify With A Self-Directed IRA

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ira-1Traditional retirement plans can leave you feeling limited within your investment options. Companies that manage these types of accounts typically only allow you to deal within a handful of basic assets like stocks, bonds, and mutual funds – a frustrating issue that can ultimately cost your retirement portfolio. But self-directed IRAs can open up a much wider range of investments and, if used wisely, new possibilities for your retirement strategy.

The Power of Diversification

Smart investors know that diversification is a fundamental strategy for successful long-term investing. Diversifying your assets comes back to that old adage: don’t put all your eggs in one basket. For example, if you invest solely in car companies, your portfolio could face a huge loss if the price of oil increases. But if you invest across a range of different companies and industries, those sudden, dramatic losses become much less likely.

A diversified portfolio should also ideally hold a range of different asset groups, as well as cover several industries, to help insulate against market shifts. For example, a portfolio with both stocks and bonds is safer than a solely stock-based portfolio because if the stock market turns negative, your bonds can help offset the loss. Market research has consistently shown that a well-diversified portfolio reduces risk and can potentially help investors achieve a better long-run return – both key aspects of a good retirement plan.

Advantage of a Self-directed IRA

Traditional retirement accounts like regular IRAs and 401k’s are controlled by the company that set up the account. This means that they decide which investments are available to their investors and, for cost and convenience, these companies typically only allow customers access to conventional assets.

By contrast, self-directed IRA accounts allow you to take more control of your financial future by accessing a much wider range of assets, while still retaining the tax benefits of retirement accounts. Self-directed IRAs are allowed to hold any asset approved by the IRS for retirement plans, including alternative investments like precious metals, real estate, hedge funds, limited liability companies, and promissory notes.

Investment Benefits

A highly diversified self-directed IRA can benefit your retirement plan in several ways. First, by having a wider range of assets than is typically available in traditional retirement plans, your portfolio is subject to lower risk, preventing losses. For example, precious metals and hedge funds are two investments that generally outperform traditional assets during market downturns. A self-directed IRA would allow you to have at least some of your savings in these more secure assets to balance out losses from other investments.

Many alternative investments, when managed properly, also have higher potential returns than traditional investments. And returns can increase further if they are connected to a field that interests you. Many investors appreciate being able to invest in real estate or own parts of a privately-held business through their retirement plans, and take great care in managing these assets, often yielding increased returns.

There’s no reason to restrict your investments in a traditional retirement account. To learn more about diversified investment strategies, alternative assets and self-directed IRA approaches, read our article on, 6 Myths About IRAs That Hurt Investors.

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