Traditional 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.
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.