Why to Consider an End-of-the-Year Portfolio Review

Estimated reading time: 3 minutes

You probably have a list of financial tasks that you’re looking to complete by the end of the year. Getting ready to file your taxes is likely the first thing on the list, followed by making the maximum contributions to your self-directed IRA, and perhaps rolling over your existing IRA with a traditional custodian to a self-directed IRA managed by a custodian such as Quest Trust Company.

Another task that should be part of your end of the year checklist is to conduct a portfolio review. Here are some reasons why a portfolio review can be so valuable.

Evaluate Your Past Investment Decisions

It’s important that you periodically evaluate the past investment decisions you make. Did your investment selection methodology from the past year yield the results you were anticipating? Were your investment decisions more volatile than you believed they’d be? Did your investments generate the level of income you hoped for? Unless you determine whether your prior decisions were good ones, it’s difficult to know whether you should continue on the same path or change course.

To Help With Your Planning for the Coming Year

Depending on your answers to the above questions, you may decide to make minor changes to your investment portfolio, or perhaps make some significant changes if they’re necessary. Or you might decide not to make any changes whatsoever. But it’s difficult to make a reasoned decision for any investment choices unless you first evaluate how your current portfolio is performing. By the same token, if there have been significant changes in your life (such as the birth of a child or getting married), then you may want to change your investment focus to reflect those changes.

Getting an Expert Opinion

When you an annual portfolio review, you can bring in outside assistance to help you evaluate your investment performance and chart a proper path forward. Sometimes getting an expert opinion, even if it’s just once per year, can prove extremely valuable.

Another Step Closer to Retirement

As you get older, your investment needs change. There are different approaches to retirement investment planning, but nearly everyone would agree that the investment needs of a 25 year old investor are going to be different from those of a 65 year old. If you don’t conduct an annual portfolio review it can be difficult to know whether your portfolio composition is appropriate for your age.

Review Retirement and Non-Retirement Accounts

Your end of the year portfolio review should include all of your retirement accounts (i.e., your IRAs and 401(k)s), as well as your taxable investment accounts. You may also wish to include holdings such as your savings accounts, checking accounts and any bank CDs, to make sure that your analysis incorporates an accurate picture of your cash holdings. When you evaluate your overall portfolio across all of your accounts you’ll be in a better position to make investment choices that can help you meet your goals.

Remember that reviewing your portfolio each year doesn’t necessarily mean that you have to select an entirely new set of investments. But conducting that review will help you decide on what changes you might want to make for the next year, or confirm that it’s best to stick with your current investments.

Should You Steer Clear of Real Estate Foreclosures Within Your Self-Directed IRA?

Estimated reading time: 3 minutes

real estate foreclosureSavvy retirement savers are likely to consider every type of investment that’s available to them. Unfortunately, individuals who set up IRAs with traditional custodians are missing out on a wide range of investing opportunities. Those who set up a self-directed IRAs with custodians such as Quest Trust Company can invest in private equity, certain precious metals, and even real estate.

And there are many potential types of real estate investments. Depending on an investor’s account balance, their willingness to take on debt within their IRA, as well as their appetite for risk, they can invest in residential properties. commercial properties, industrial or farmland properties.

In recent years, given the number of residential properties that have faced (and continue to face) foreclosure, more investors are looking at foreclosures as having good potential for significant long-term gains. But there are a number of factors that can make investing in real estate foreclosures more challenging than a straightforward market transaction, so you’ll need to consider each of them before you decide whether foreclosures are right for you.

Long Investing Timeframe. Because there are many legal steps and obligations that must be met as part of the foreclosure process, it can take significantly longer to buy a foreclosure property than to buy a property on the open market. The timing varies from state to state, but the entire process can extend for a year or more in some jurisdictions.

No Opportunity for Appraisal or Inspection. It’s quite likely that once a property goes far enough through the foreclosure process that is ready for public auction, there will be no opportunity to conduct an independent appraisal or inspection on the property. In instances where a pre-auction inspection is allowed, it is often little more than a quick “walk through” by the prospective bidders. Since conducting your research and having a good idea of what you’re getting into is important for any investment – real estate or otherwise – this information gap must be taken into account.

Unhappy Prior Owners. With foreclosure properties, not being able to conduct an inspection is likely to be even more important than would be the case for an open market transaction. It’s not unheard of for property owners who are being foreclosed upon to stop their normal upkeep and maintenance of the home (and in more extreme cases even do intentional damage to the home and its infrastructure).

No Occupants. During those stages of the foreclosure process in which no one is living in the home, it can quickly fall into disrepair or perhaps become a target for theft. Even if there are no personal effects in the home, thieves might target copper tubing, wiring, appliances and other fixtures.

Local Market Dynamics. Finally, it’s important to realize that sometimes you get exactly what you pay for. Look behind the reasons for the foreclosure – did the neighborhood become unreasonably expensive to quickly (in which case there may be more foreclosures in the same area, thus perhaps making it harder to realize a profit on the property you’re interested in)?

Don’t automatically assume that a foreclosure property will yield large investment returns. Take all the relevant factors into consideration so that you can decide whether a particular property is right for you.

How to Compare Real Estate Investments with Other Investment Types

Estimated reading time: 3 minutes

real estate investmentIt can be financially risky for an investor to become overly committed to a single investment class, Becoming too focused on a particular type of investment makes it difficult to maximize the performance of an investment portfolio because not all investment options are being considered.

While the single most important factor in each investment choice you make is likely to be the expected or anticipated investment performance, most investors are also likely to consider overall portfolio diversification as well as suitability of any particular investment to their individual risk profile. Comparing investments within a particular investment class (for example, one stock versus another stock) is relatively straightforward, but it can be more challenging to compare across different investment types.

Since real estate is a particularly popular investment for individuals that have a self-directed IRA with a custodian such as Quest Trust Company, let’s examine some of the factors that are relevant to comparing real estate investments to other investment types.

Liquidity. Liquidity is perhaps the biggest distinguishing factor between real estate and many other types of investments. When you hold investments in publicly traded stock, for example, it’s easy to open or close investment positions whenever the market is open. Some investors may even trade in and out of a particular stock multiple times within a given trading day.

In contrast, the timing of a transaction to buy or sell real estate is generally measured in days or weeks (and often even months). It’s therefore important to assess your liquidity needs before making any real estate investment. Investors or retirement savers with significant other assets, or whose investing timeframe is very long) are generally in a better position to bear the potential downsides of relatively illiquid real estate investments.

Leverage. Using leverage (i.e., borrowing money to make an investment) is generally much more common for real estate investments than other investment types. With the proper use of leverage an investor can significantly boost their investment returns, but only if your total cost of borrowing is low.

Furthermore, in the context of a self-directed IRA, using leverage to purchase real estate can trigger certain unrelated business taxable income (“UBTI”) liabilities for the IRA. If the UBTI rules are not fully understood, an investor who uses leverage to purchase real estate in a self-directed IRA can find themselves in a very bad financial position trying to come up with the funds to pay those taxes.

Expenses and Taxes. Real estate investments generally involve a much higher level of ongoing expenses. Whereas investments such as stocks and mutual funds may not cost you anything beyond your brokerage commissions to buy and sell, owning real estate comes with property tax liabilities, maintenance and upkeep fees, as well as possibly even management fees. These expenses are generally tax deductible against any income you receive on the property, but the value of this deduction will generally be lost within a self-directed IRA. When trying to compare real estate with other investments, be sure to fully consider all associated expenses.

Regardless of the size of your self-directed IRA, there’s a good chance that real estate can help you meet your retirement goals. Understanding how to compare real estate investments with other investment types is the first step in making the right financial decisions.