I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. – Warren Buffett
Self-directed IRAs can help protect you from stock market crashes
If you have been paying attention for the past 14 years, then you are probably aware that at certain points in time the stock markets have had what some would call a “flash crash”. This typically has happened in history when the number of sellers overwhelms the buyers, or there are no buyers. If there are momentarily no buyers, this means there is “no price”. Some people might call that worthless, but it doesn’t mean it doesn’t have value. It just means no one is willing to buy at that moment. Am I saying this will happen in the future? No, I am not. However, you need to be prepared in case it does.
Should you worry about the market crashing?
Yes… and No.
While you may not be worried today, what if this economy gets worse? What if the Ukraine war gets worse? What if… What if… What if…
The more important question is, how are your investments positioned that could be impacted by a crash or even a recession. Warren Buffett frequently poses the thoughtful question of, “What if the stock market closed and didn’t reopen for 10 years?” Would you be happy with your investments 10 years later? What companies would be best suited for that environment?
Let’s take that concept a step further. Do you have 100% of your retirement funds in mutual funds, stocks, or bonds? If so, then why? Is it because you want to invest in the stock market? Or is it because you are not aware that you can invest outside the stock market? If it is the latter, then you are in good company. More than 80% of the investing public is not aware that they can invest their IRA outside the stock market. Less than 10% is actually investing in alternative investments with their self-directed IRA or self-directed 401k.
Are traditional investments better than alternative investments? Not necessarily. It depends on the investment. While many people invest 100% of their investable assets in stocks and bonds, many people also invest 100% of their investable assets outside the stock market. If you have read my earlier post, The Real Estate Investor’s Guide: Using a Self-Directed IRA to Invest in Real Estate, then you know why someone would do this. There is no right or wrong way to invest. People have shown that many different assets and strategies can be profitable investments if done correctly.
The benefits of self-directed IRAs are that you don’t have to make the choice of having 100% of your assets held in one area or asset type. You can choose to self-direct your retirement in any allowable investment. This could be any combination of both traditional or alternative investments.
Diversification via proper asset allocation is one of the most important concepts in investing. It helps to reduce portfolio risk. Proper diversification helps to mitigate many of the risks of investing in only one area. It has been said that if you don’t have at least one investment something in your portfolio that frustrates you, then you are not well diversified. For example, if you were only invested in Russian stocks recently, then you might be unhappy with the outcome as US investors are not allowed to invest into Russian assets. If you owned any of these assets at best you would have to wait until the markets allow you to trade them again… which might be a while. Worst case, they would be worthless. We don’t know how that will play out, but we know that currently your assets held in these Russian securities are frozen (no pun intended).
What can you do to protect yourself from these risks?
While deciding to invest outside the stock market does not protect you from all risks, it does protect you from the type of market-related risks that investors are becoming increasingly wary of. Let’s use real estate as an example of an investment you can make with your IRA outside the stock market. Real estate investors might not want to invest in real estate right now, but great deals will happen in the near future if these trends continue. Also the likelihood of you not being able to buy real estate due to the market freezing up is close to zero.
One way to protect yourself is to invest in what you know. This was Peter Lynch’s advice.
This means that if you are an expert in real estate, then invest in real estate. If you are a farmer, then invest in farmland or futures contracts for commodities you know well. If you are an entrepreneur, then invest in startups. Whatever your skill-set, choose what you know to improve your odds of success.
What should you do next?
- Learn – The first step you need to take is to learn more about self-directed IRAs. This will allow you the freedom to explore your investment choices, to invest in what you know best. These two pages are a good place to start
- Expert Advice or DIY – Next you need to decide whether you want to do-it-yourself or whether you can benefit from financial advice. Investing in self-directed IRAs can be a great choice for some people, but it is not as easy as hitting a few keystrokes on your keyboard. Making mistakes can be costly, so make sure you are working with a licensed expert who understands this type of investing. Make sure this expert is licensed to provide you with financial advice. Licensed attorneys, CPAs, and financial advisors are professionals who can make this claim. You can review this page to learn more about both options.
- Expert Advice – If you are going to work with an expert, such as Innovative Advisory Group, then we will do the heavy lifting for you. Contact us to learn more about how we can help you.
- DIY – If you have decided to do-it-yourself, then we have some resources available to you that can help you along the way. While we don’t recommend this path, we understand that some people will always pass on valuable advice. That is why we have created resources to help point them in the right direction.
- Free Guide – Finally, we are offering a free resource guide for Self-Directed IRA investors who sign up for our private email list.
- 9 Common Mistakes Investors Make Using a Self-Directed IRA (Get your free report here)
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About Innovative Advisory Group: Innovative Advisory Group, LLC (IAG), an independent Registered Investment Advisory Firm, is bringing innovation to the wealth management industry by combining both traditional and alternative investments. IAG is unique in that they have an extensive understanding of the regulatory and financial considerations involved with self-directed IRAs and other retirement accounts. IAG advises clients on traditional investments, such as stocks, bonds, and mutual funds, as well as advising clients on alternative investments. IAG has a value-oriented approach to investing, which integrates specialized investment experience with extensive resources.
For more information, you can visit innovativewealth.com
About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and alternative investment markets. He received a BA degree in Economics from Trinity College in Hartford, CT.