If you are nervous about the where the stock market is headed, you are definitely not alone. At the start of this year, BlackRock, the world’s largest asset manager, reported that it was seeing many of its biggest clients pulling out of the stock market in favor of more tangible assets like real estate, private credit, and commodities.
If you are thinking of adopting the same strategy, don’t forget that the right retirement account can be a useful investment vehicle.
Stock market volatility – knowing the right signs
Over the long term, stock purchases can earn a high return. However, in the short term, they are extremely volatile investments. The market will inevitably swing up and down, dragging the value of your portfolio along with it. It can be difficult – either psychologically or financially – to stand by your stock investments in the midst of huge market changes. This uncertainty can lead to poor investment choices, like selling low during a temporary downturn.
Beyond short term shifts, there are larger cycles to the stock market. After years of gains, many believe that the stock market is long overdue for a bear market, which is one reason so many of BlackRock’s clients are taking a cautionary approach and moving their money elsewhere. Alternative assets, like real estate and loans, can generate similar returns to stocks, without as much risk and volatility. Compared to stocks, these types of investments are also easier to understand for someone without a financial background.
The limits of traditional retirement plans
Traditional retirement plans like the 401(k) and non-self-directed IRAs offer limited investment options and usually do not include alternative assets, mainly for cost reasons. As a result, investors are often left to choose between either risky stocks, or bonds and certificates of deposit (CDs), which are less volatile but typically earn lower returns.
Many people looking to put their savings into alternative assets often overlook retirement plans as an investment vehicle, and so they miss out on some great tax benefits. Even worse, some make an early withdrawal to access their retirement savings, triggering a 10% penalty if you are younger than 59 ½ years old.
But there are retirement plans out there that can broaden your investment horizons. Self-directed IRA accounts allow you to reap the tax benefits of retirement plans while also giving you more flexibility in your investments.
The self-directed IRA
Self-directed IRAs are structured like traditional IRAs, and carry the same tax benefits. The main difference between these two plans is that the companies that run self-directed accounts allow you to invest in alternative assets like real estate, personal loans, and precious metals. Despite the advantages and growing popularity of alternative investments, many investors remain unaware of self-directed IRAs – only about 2% of IRA investors use these accounts.
Setting up a self-directed IRA is easy – just contact a company that handles this type of account. If you already have money in an existing IRA, you could transfer those funds to your new account through a rollover at any time. However, if your retirement savings is in a work-sponsored plan, you will need to wait until you leave that job to facilitate a rollover. Once you complete the rollover, you can start moving your savings out of the stock market and into new alternative assets through your self-directed IRA.
Investing always comes with some degree of risk, but you can help minimize that risk with a more diverse portfolio.
