Here in the United States, Self Directed IRA investors have generally taken it for granted that the interest rates commonly available on ‘safe money’ – what investment theorists refer to as the “risk-free rate of return’ will be positive.
Sure, we understand that inflation could outpace the rate of return on money markets. But at least we have the consolation that the nominal rate of return on safe money will have some sort of positive value.
But as millions of people in Europe and Japan are now discovering, that’s not entirely the case. Central banking authorities in a number of major economies have now set their key rates lower than zero. That’s right – these central banks have set the time value of money at a negative number.
That’s a direct attack on the world’s savers and lenders. And the rot is spreading through the world’s bond markets: According to Bloomberg, some 25 percent of all the global outstanding bond debt in the world has a negative interest rate. That amounts to more than $7 trillion of issued debt.
Yes, in America we’ve had moments in which a ‘flight to safety’ resulted in a temporary glut of savings moving to Treasuries, forcing yields slightly below zero for a brief period of time. That’s just investors paying a premium for bonds. But what’s happening in Europe now, and what’s happening in Japan, is different. These negative yields are a direct and intended result of national monetary policy. Their governments and central bank authorities (to the degree they have independence) are desperate to stimulate consumption that they will rob investors to provide them with an incentive to spend now, rather than provide the capital their economies will need to create productive assets in the future.
They can get away with this for a while if they anticipate a deflationary cycle. After all, if deflation is faster than the negative interest rate, these deposits still earn a net positive rate of return compared to domestic alternatives. But money doesn’t necessarily have to stay local.
What should Self Directed IRA investors do?
Self Directed IRA enthusiasts have some key advantages compared to conventional IRA investors: You can retain the tax advantages of an IRA or other retirement account while still retaining the ability to invest nearly anywhere. While the folks who have all their money in an account with a major investment house are getting advised to just sit there and take it, you have the ability to seek greener pastures elsewhere – particularly if you are willing to take on a bit of risk in the process.
Here are some examples:
Borrowing is cheap. If returns on bond investments are low, that means money is available cheap. If you want to leverage up and buy some assets – in whatever class – now’s the opportunity to do so. When the time value of money is negative, then it makes sense to borrow and invest as much as you can.
Time to buy gold. As returns fall, so does investor interest, and so does the local currency, most of the time. Gold – and by extension, silver – is a proven hedge against declining currency values. If central banks are not defending their currencies, than it’s up to you to defend yourself.
Real Estate may be attractive. Obviously, local factors will dominate global ones. But where the currency is not defended, real estate, like gold, becomes more attractive. Even though the real estate market has appreciated substantially (the easy money has probably been made), rents continue to climb on strong rental demand in many markets. While very expensive markets like San Francisco are risky, there are lots of opportunities in smaller inland cities that are experiencing strong economic growth, where populations are increasing steadily and which continue to attract business and investment.
Think Outside the Box. Safety is getting more expensive in traditional asset classes. But leveraging is still relatively cheap and where interest rates go negative they actually pay you to do it! There are still opportunities in tax liens and tax certificates, for example, and hard-money lending to borrowers who traditional lenders are not serving well. This leads to some compelling spread opportunities for adventurous Self Directed IRA investors.
If you don’t want to be stuck in the same 60/40 stock-bond asset allocation or whatever some broker is suggesting for you even as central banks crush your expected returns by driving interest rates down to less than nothing – if you want to create an escape hatch from pathetic returns, we want to work with you.
American IRA, LLC, works with investors all over the country who want to take an off-ramp from conventional investing, Wall Street companies and their long history of high expenses and low returns. Our clients all take personal control of the assets in their IRAs and declare independence from the big investment firms through Self Directed IRA investing.
They benefit from the vastly greater freedom of movement, diversity in asset classes available to them, and more access to leveraging strategies, and greater personal control of their investments. In many cases, our Self Directed IRA investors have a controlling interest in the assets in these accounts. That’s a very different scenario than owning a few shares of a big mutual fund whose manager will never take your call!
To learn more about self-directed investing, visit us on the Web at www.americanira.com, or call us today at 828-257-4949.
We look forward to hearing from you.