Knowing Your Risk in Self-Directed IRAs

Many times journalists will write about Self-Directed IRAs and describe them as inherently risky. This isn’t quite accurate because the Self-Directed IRA isn’t an investment itself, but a type of account in which you might hold an investment of some sort. The Self-Directed IRA is quite neutral in terms of what type of asset you hold in it. As you might expect, some assets commonly held in Self-Directed IRAs can be quite volatile and quite risky, and other assets held even in the same Self-Directed IRA can be quite safe.

As former Nobel Prize Winner for Economics Harry S. Markowitz demonstrated in the 1950s with his groundbreaking Modern Portfolio Theory, you can even hold very risky assets as a part of a larger portfolio, that have the net effect of reducing the overall volatility of your portfolio! All that you need is a set of investments that tends to zig while your other investments are sagging. The volatility should help cancel each other out, and all you’re left with, in theory, is the long-term (hopefully) upward trends of each of the asset classes you select to include within your portfolio.

Need some help determining your risk tolerance

It’s not easy quantifying the risk tolerance of individual investors. There is a lot of debate back and forth about what ‘risk’ even means as far as the investment industry is concerned. There have also been a number of tools devised to help Self-Directed IRA investors and others calculate where they stand relative to other investors when it comes to tolerance for the possibility of loss.

Here’s one of our favorites, and it only takes a few minutes to fill out.

Note: There’s no right or wrong answer. Everyone is different in this regard, and all honest answers are valid.

Low-Risk Options for Self-directed IRAs

The great thing about the self-direction concept is it truly allows investors to go anywhere, when it comes to determining their own exposure to risk. The flexibility you have with a self-directed retirement account allows you to dial your risk exposure up or down according to your own judgment, limited only by the liquidity of the investments in your portfolio.

If you’re looking for ways to reduce your stock market risk and you want some options toward the safer end of the risk spectrum, here are some possibilities for your self-directed IRA.

  1. Cash. This includes cash equivalents like money markets, certificates of deposit and ‘sweep’ or cash management accounts. There’s nothing wrong with holding some cash in your IRA while you look for profitable ways to invest it. Indeed, you may definitely want to hold at least some ready cash within a real estate IRA or an IRA that also owns a small business, because you’ll need operating cash to handle crises, pay routine bills, or take advantage of opportunities. CDs also come with FDIC protection, up to $250,000 per account (NCUA protection in the case of credit unions).
  1. Fixed Annuities. True, annuities aren’t ‘self-directed,’ in that the underlying portfolio is managed by an insurance company, not the investor, directly. That’s true of money market funds, too. Meanwhile, annuities are designed to do just what IRAs are supposed to do: Generate income, either now or in the future, for the retiree to live on. Annuities come with a variety of potential guarantees which are customizable to your specific situation. Ultimately, though, fixed annuities are not subject to downside market risk, and are therefore a time-honored place to stash money.

Some planners don’t care for storing annuities within an IRA of any kind, other than perhaps a 403(b) they came in to begin with. This is because the tax deferral features of Traditional IRAs and annuities duplicate one another. However, some people choose to purchase them anyway because they simply want the guarantees the insurance company offers, such as guaranteed minimum withdrawal or guaranteed minimum income benefits.

  1. Gold, precious metals and real estate. Yes, all three of these investment options are subject to substantial price volatility. No one knows what the price of gold will be in a year, nor the market value of any given home. So why are we including them in a list of ‘safe investments?’ Because they are tangible, and unless the earth opens up and swallows them, no matter what happens to the price, they probably aren’t going to zero. An annuity company could go broke tomorrow, and be unable to honor its commitments. To this day, no annuitant has ever been totally unable to collect on an annuity contract drawn on an American life insurer. But it’s at least theoretically possible. If the economy collapsed tomorrow, gold will likely be in high demand as a replacement currency – and no matter what happens to the broader economy, at the end of the day, the homeowner still has a house.

Furthermore, these three investment options, and several others, are not highly correlated with stocks, bonds and most mutual funds commonly found in off-the-shelf IRAs offered by investment companies. For this reason, adding a small amount of precious metals or an allocation to real estate can act as a counterweight to the usual volatility of the stock market. So even though gold and real estate can be quite volatile, the overall volatility of your portfolio taken as a whole may decline as a result of adding assets like these.

American IRA, LLC is a leading provider of administrative services and expertise in the field of Self-Directed IRA investing. We also support self-directed SIMPLE, SEP, 401(k), Coverdell and even Health Savings Account investment. In short, we liberate investors from the ordinary and allow them much more decision-making flexibility in all common tax-advantaged accounts. For more information, visit us at, or call us at 866-7500-472(IRA).