No one has a crystal ball, not even the Savvy Self-Directed IRA owners, but the general trend for interest rates in the United States is upward. The Federal Reserve has indicated plans it will be tapping the brakes on the economy over the coming year by increasing the Federal Funds Rate and drawing some excess liquidity out of the economy by selling Treasury bonds and retiring the funds – its chief mechanism for controlling the money supply.
So what should a Self-Directed IRA owner do to structure a portfolio to take advantage of rising rates? Consider these measures:
- Reduce exposure to long-duration debt. Reduce holdings in debt that matures in 10 years or longer, since these bonds are most hurt by interest rate hikes. Instead, focus holdings on shorter-duration debt instruments – ones that mature in just one to five years – and in asset classes that are historically resistant to interest rate hikes.
- Increase your real estate holdings. It’s better to own them now, before the rate hikes, than try to borrow money at higher rates down the road to fund your real estate IRA.
- Reduce exposure to zero coupon bonds and any mortgage your Self-Directed IRA may hold with a balloon payment at the end of it. In a rising rate environment, a steady income stream can provide a handy ballast to help you withstand some choppy seas ahead.
- Consider investing your Self-Directed IRA in tax liens and tax certificates. While these are technically debt instruments, national interest rate trends will have little or no relation to their performance.
- Concentrate on stable, plain-vanilla rental properties within your real estate IRA or Self-Directed IRA. Very high-end and very-low-end homes may be sensitive to movements in mortgage rates. But family-friendly rental properties with appeal to the broad market has a built-in demand that does not go away with rising interest rates. Indeed, rising rates actually support demand for lots of rental residential properties, since it makes it harder to qualify to buy a home at any given price point. This encourages people to keep renting. They may as well be renting from you!
- Don’t rely on income stocks and mutual funds. These can be quite interest rate sensitive. When yields rise, people who migrated to dividend-paying stocks tend to move back into bonds.
- Don’t overdo it. Many of these changes will be marginal for most of our investors – especially our smartest ones. Your overall approach should be to stick with your long-term plan, consistent with your risk tolerance. Stay diversified, and keep your eye on the long term.
American IRA, LLC is one of America’s leading providers of administrative services for Self-Directed IRAs and real estate IRAs. The unique combination of tax advantages and go anywhere flexibility of the Self-Directed IRA makes the Self-Directed IRA an excellent vehicle for long term investing in all kinds of markets – including a rising interest rate environment.
For more information, or to schedule a no-obligation consultation, visit us on the Web at www.americanira.com. Or call us at 866-7500-IRA(472).
We look forward to working with you.