Posts

Return of Stock Market Volatility Underscores Need For Self-Directed IRAs and Diversification

February 2018 has been a stressful month for stock investors. Volatility is back with a vengeance: The Dow Jones Industrial Average components – what we used to call “blue-chip stocks” for their safety and staidness, took some big stumbles early in the month. This happens every once in a while, – but this time the declines triggered some program trading, computers were programmed to dump stocks as soon as the Dow, S&P 500 or some other signal dropped below a given level. The selling forces stocks lower, triggering even more program trade selling, and so a vicious cycle takes over.

And that, despite an economy that is prospering by most metrics, is how the Dow recorded a record 1,175 point loss on February 8th.

One might call it a reaction to a bull market that stockholders have appreciated over the last year. While we have seen a recovery since then (and stocks are setting new highs), the recent volatility has hopefully reinstated a healthy appreciation for risk: It is pretty scary to see 5 to 10 percent of your retirement nest egg disappear in a couple of days. Volatility can hurt.

Fortunately, the vast majority of our clients did not need to bat an eyelash. Indeed, some of them may even benefit from the volatility, as investors dump stocks looking for safer assets.

Self-Directed Investing means you do not have to worry about what the stock market does every day. Many of our clients have much of their long-term money invested in far more sound assets than stocks such as:

  • Rental properties
  • Commercial real estate
  • Tax liens and certificates
  • Gold and precious metals
  • Closely-held companies, LLCs and partnerships
  • Farms and ranches
  • Land
  • Private equity
  • Venture capital
  • Private lending
  • Mortgage lending
  • Equipment leasing

… and more.

While the value of each of these investments fluctuate, none of them are tied to the day-to-day fickleness of the stock market. Our clients have the luxury of being indifferent to most of the noise on Squawk Box and Jim Cramer’s Mad Money.

Most mature investors regard shows like these as a waste of time. The smart money is always way ahead of what the average consumer sees on TV.

As television and radio personality Dave Ramsey is fond of saying, “investing is a crockpot, not a microwave.” That is the approach taken by most Self-Directed IRA owners, who define holding periods in terms of years and decades, not hours and days. The longer your holding period, and the longer your investment time horizon, the less you have to worry about short-term volatility.

For alternative asset investors, there is no daily price index to track – and certainly no intra-day prices to obsess over. The focus is on the intrinsic value of the investment, and not on the opinions of millions of strangers – most of whom are not very smart anyway.

The lack of intraday pricing, and an overall more deliberate approach to investing and valuation, makes it much easier to avoid falling into the many traps of stock market speculation such as:

  • Focusing on the short-term
  • Panic selling on an impulse
  • Program trading causing you to sell when you should be buying
  • Thinking you are diversified when all your assets tend to move together

For many of our investors, the lack of correlation with the fickle stock market is a source of comfort. They derive piece of mind, knowing however fearful the talking heads on TV are behaving (generally at the wrong times), they do not have to participate in any correction or bear market.

Diversification is a fundamental principal of sound investing. Most individual investors do not do nearly enough of it, and find themselves over-exposed to a volatile stock market at the wrong time.  Self-Directed IRA strategies help you diversify, providing a much-needed hedge against stock market volatility – while still exposing you to opportunities for long-term growth and income.

If you want to do a thorough portfolio review, and find out how you can benefit from implementing Self-Directed IRA strategies in your own retirement investing, call us today at 866-7500-IRA(472).

Private Equity In Your Self-Directed IRA

Own tomorrow’s Dow components today! Or we hope, anyway. But you did not have to invest with Steve Jobs while he was still running Apple out of a garage in the 1970s to do well with private equity or private placements in a Self-Directed IRA.

Just invest in solid, well-managed companies with good accounting and controls, who have a viable business that provides a good value and you can do just fine – and even get better returns over the long run, in many cases by taking advantage of the tax benefits of a Self-Directed IRA.

What is private equity?

When a small company wants to raise capital, it can borrow the money, or it can sell off a piece of itself to investors, who are then entitled to a share of all future dividends the company issues. If the company is publicly traded, it can sell shares over the stock market. But if the company is not publicly traded, it will seek out investors anywhere it can, and negotiate a share price privately.

Many companies do not want to go through the time and expense of issuing a publicly-traded security. Just maintaining a listing on boards like Nasdaq or the NYSE can cost tens of thousands of dollars per year. Unless they are getting major investment bank support to help them place their shares, it is just not worth it to these smaller companies.

Many smaller companies with no regular earnings cannot get traditional lender financing, either. Most traditional lenders just are not equipped to serve this market, as borrowers typically do not meet the lending criteria for the banks’ backers. They do not have the regular earnings to support income-based underwriting, and they may not have real estate or other kinds of readily marketable collateral that most banks rely on to justify a loan.

But Self-Directed IRA owners are not limited by these criteria. Moreover, Self-Directed IRA owners also frequently have the long time horizons that companies seeking investment need. For example, if you lend to or invest in a real estate developer, it may be years from the time you provide the financing to the time the real estate developer has a property completely built and sold off so that it has some cash to pay lenders and investors with!

Meanwhile, private equity seekers have to sweeten the deal, to compensate the Real Estate IRA investor for the cost of tying up their money for a long time. That usually means better terms, and better long-run expected returns. That is, private equity seekers (and private debt seekers as well) have to discount their offerings to attract investors.

Qualifying for Private Equity Placements for your Self-Directed IRA

Not just anybody can be a private equity investor and be eligible for direct placements. In order to invest in a direct placement of private equity, you must meet the definition of an accredited investor, according to Rule 105(a) of the SEC’s Regulation D.

Specifically, you must have a net worth of at least $1 million (not including your primary residence), OR;

You must have an income of at least $200,000 in the last two years if single OR;

Have an income of at least $300,000 in the last two years if married.

Reputable brokers or sellers will have you submit proof of your status as an accredited investor before selling you the shares or bonds, if it is a private debt placement.

Because of the substantial returns available in private equity (the potential is virtually unlimited), and the long time horizons involved, private equity placements can make excellent candidates for Self-Directed IRA investment.

Before you invest, though, understand that these investments, like many popular Self-Directed IRA assets, are frequently not registered securities, and are exempt from a number of SEC regulations and reporting requirements.

They also tend to be very early stage companies, subject to substantial economic risks. They may have unproven products, service offerings, inexperienced management teams, difficulty securing follow-on funding, and they could even be fraudsters. It is, therefore important to engage in a thorough due diligence process before you invest in any private placement offering within a Self-Directed IRA.