How Self Directed IRAs Can Help Protect You From Stock Market Crashes and Halted Trading on Exchanges


self directed ira wall street

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 were paying attention yesterday, then you probably heard that the New York Stock Exchange (NYSE) halted trading for 3.5 hours and Chinese stock market continue to crash. So much for Wall Street having a lazy summer in the Hamptons.

Should you worry about these events?

Yes… and No.

As of today, you should not have much to worry about… unless you have money in Greek banks, then you are allowed to sweat.

While you may not have much to worry about today, what if these events were more pronounced? What if they impacted your investments in a more direct way? What if the impending Greek crisis causes stock markets to crash. What if the stock market closed and didn’t reopen for 5 years? Would you be happy with your investments?

Warren Buffett has made a statement in the past that investors should invest as if the stock market would be shut down and not reopen for the next 5 years. What companies would you want to be invested in with this scenario?

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 particularly. While many people invest 100% of their investable assets in the stock and bond markets, 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-directed 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. For example, if you were only invested in Chinese stocks then you might have a problem. As of yesterday, approximately 45% of Chinese stocks have been halted on the stock exchanges in Shanghai and Shenzhen1. That means you cannot sell your shares. How many more days before the entire Chinese stock market has halted trading? At this rate, maybe by the end of the week. Despite what Warren Buffett says, Don’t put all your eggs in one basket unless you are an extremely successful investor.

What can you do to protect yourself from these risks?

While investing outside the stock market does not protect you from all risks, it does protect you from the type of risks that investors are becoming increasingly weary of. “Poll after poll shows market trust is in the dumps. Last summer, Better Markets found that 64% of voters don’t trust the markets and 60% support more regulation. A poll by CNBC in March 2014 found 75% of respondents felt the market was “rigged.” ”2 If you have been invested in the stock market from the past 15 years, then you are aware of the risks involved.

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?

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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.

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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.

Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.



1) Reuters

2) MarketWatch

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