Investments

Council Post: Retirement Investors Use Alternative Assets To Foil Market Volatility

Stock market record highs seem to come and go with surprising regularity these days, but so does another market event — volatility. Volatility has been on display this fourth quarter as investors confront worries over a potential U.S. recession, the ups and downs of U.S.-China trade talks, corporate earnings releases and impeachment proceedings against President Trump.

Investors know whipsaw market action isn’t good for their nerves, and when it comes to their retirement savings, many are loath to watch their nest eggs get battered by market volatility. That is why I’m seeing retirement investors diversifying their retirement holdings away from stocks by using self-directed individual retirement accounts to invest in alternative assets. And these investors indicate they expect to continue this trend in response to market volatility.

Retirement Investing Beyond The Stock Market

Currently, traditional IRAs assets are invested predominantly in individual stocks and stock mutual funds. But it’s possible to own alternative assets — such as real estate, private equity and gold — in an IRA by working with a custodian that allows investments in non-traditional assets. IRA owners are only restricted by law from investing in life insurance and collectibles.

As a self-directed IRA custodian, my team knows that many of its clients choose these accounts for the purpose of investing retirement dollars in alternative assets. Given ongoing bouts of volatility, our annual survey of over 900 clients with self-directed IRAs found that more than 31% plan to increase their allocation of alternative investments, while 32% have already done so. The survey also found that 64% of respondents plan to maintain or increase their IRA allocation to alternative assets in the next five years.

Natixis Investment Managers’ 2019 Global Survey of Individual Investors echoes these findings. Their survey also finds that market volatility is piquing investor interest in alternatives. Almost six in 10 investors said they are considering investments beyond stocks and bonds given volatility, while 65% indicated they want investment strategies that are less tied to the broad market.

What type of alternatives are retirement investors considering? In our survey, more than 50% of respondents said it’s likely they’ll increase their allocation to real estate, while 30% said they’ll pursue private equity opportunities.

The Benefits Of Owning Alternatives In An IRA

Investing in alternative assets using a self-directed IRA affords investors multiple potential benefits. The most important one, our survey found, is diversification and the capacity for alternatives to deliver excess returns while reducing portfolio risk. Investors also value the ability to invest their retirement dollars in businesses, sectors, or industries — such as real estate or natural resources — in which they have personal knowledge or expertise.

The tax advantages of owning alternatives in an IRA are also attractive. Investment returns in a traditional IRA can compound year after year on a tax-deferred basis, while investments held in a Roth IRA may accumulate tax-free.

For investors curious about investing in alternative assets using an IRA, a good first step is discussing the pros and cons of this retirement strategy with your financial advisor. Opening a self-directed IRA is a straight-forward process that can typically be handled by your financial advisor.

If you decide to move forward, keep in mind that owning alternative assets comes with its own set of risks. Some alternatives are highly illiquid, while others may be hard to value. The IRS also has strict rules, such as avoiding prohibited transactions, that self-directed IRA owners must follow. I recommend working with a tax or legal advisor who is familiar with the rules and regulations of these types of accounts before making any investment commitments. Investment professionals may be able to spot red flags that you overlook and help you avoid penalties and tax consequences if you mistakenly break IRS rules.

As we look ahead to next year, now may be a good time to discuss with your financial professional whether alternatives deserve a place in your IRA. With multiple risks continuing to overhang the market — from unresolved trade talks to the upcoming 2020 presidential election — it is unlikely that market volatility will fade. Instead, I believe alternative assets will play a growing role in investors’ retirement portfolios as the need to generate returns while managing risk remains a critical focal point.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.
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