What’s your current level of investment experience? If you’ve done any investing at all, then congratulations! Across the broader U.S. population, things don’t look particularly bright. Over the past few years, various surveys have concluded that approximately one-third of American adults don’t have any savings at all, and nearly half of American adults only have an emergency fund that would cover less than 90 days of their living expenses. The statistics for retirement savings are equally as dismal.
And even among those who have begun saving for retirement, many limit their savings activities to just a few types of assets, the most popular of which include broad market mutual funds and short term U.S. government bonds. And some, concerned with the preservation of capital beyond all other concerns, use their funds to invest in things like bank CDs.
Even amongst those who have actually invested for growth or income, many have limited their activities to mutual funds or whatever other options were available within or promoted by their discount broker or 401(k) plan administrator.
There’s certainly nothing inherently wrong with those types of investments. Mutual funds can make the process easy for individuals who don’t have the time, inclination or confidence to do a lot of research or make more specific investment decisions. But the problem with simply investing in broad market investments like mutual funds is that you’re limiting your long term growth potential, particularly during down market times.
Fortunately, you can use a self-directed IRA to invest in a wide range of assets that can broaden your portfolio so that you can take advantage of various market conditions.
For example, you can use a self-directed IRA to invest in real estate and precious metals, two asset classes that have historically performed well when the stock market has underperformed. You can use your account to invest in a number of different types of real estate, including single-family and multi-family residential properties, commercial properties, farmland, industrial properties, and even undeveloped properties.
In order to gain exposure to precious metals, you can use your self-directed IRA to invest by purchasing metals in their physical form (pure bullion or government issued coins, but not collectible coins), or in precious metals mining and exploration companies. If you choose to invest in physical metals, it’s important to plan for the costs of hiring a professional custodian to hold those metals. If you were to hold that type of precious metals investment yourself, doing so would be considered taking a distribution from your account, which would potentially subject you to an early withdrawal penalty, as well as any taxes that would otherwise be due.
Furthermore, you can use a self-directed IRA to invest in private companies by taking either equity or debt positions. Depending on the nature of the investment, the performance of these types of investments can provide you with the opportunity to improve the return on your portfolio when your other investment types aren’t performing quite as well.