It is not a matter of “if,” but “when.” Stock markets fluctuate. And while none of us knows the day or the hour, at some point stocks will suffer a correction, and even a collapse of 40 to 50 percent from their highs. Those relying heavily on equities for their short-term to intermediate-term financial needs are the ones most likely to suffer a severe economic setback. Conversely, investors adopting Self-Directed IRA strategies sidestep stock market volatility to some extent and, likely, may fare much better in the next bear market.
It has happened before.
- During the 2008-2010 mortgage crisis, the S&P 500 fell 56 percent from its October 2007 high.
- The Internet bubble collapse caused the S&P 500 to fall 49.1 percent from its March 2000 high.
- The S&P 500 fell 33.5 percent from its high in August 1987 – including a 22.6 percent drop in a single day, “Black Monday,” October 19th, 1987.
- The S&P 500 fell 27.8 percent from its November 1980 high as the Volker Fed tightened the nation’s money supply to combat inflation – taming inflation but sparking the painful “Reagan Recession” of 1981-82.
Many people diversify out of one paper asset and into two more – selling stocks and buying bonds and going into cash and think that constitutes meaningful diversification. For the most part, that is all the big Wall Street brokerage houses can sell. That is how they make their money. But they will not tell you a truly diversified portfolio includes much more than stocks, bonds and cash equivalents.
Diversifying by opening a Self-Directed IRA means you can invest in assets unable to be held by Wall Street brokerage type firms. As such, your Self-Directed IRA has the freedom of investing in:
- Direct ownership of real estate properties that you
- Interests in closely-held businesses (partnerships, LLCs and non-publicly-traded C corporations) that you can control.
- Actual, physical gold, silver, platinum and palladium coins and bullion.
- Private lending at above-market interest rates to borrowers that you identify and select yourself, on terms you
- Tax liens and certificates generating safe returns which are completely uncorrelated with stock markets.
- Private placements, debentures and venture capital opportunities that occur below Wall Street’s radar.
- Coin and token offerings and opportunities that Wall Street simply does not comprehend.
… and much more.
Yes, stocks have a solid history of performing reasonably well over time periods exceeding 25-30 years. A truly diverse portfolio should contain elements which perform well even when stocks are in the doldrums.
If a 25 percent to 50 percent stock decline is a deterrent, then you probably need to be more diversified, and take more direct control of your retirement investments. You cannot just leave it in the hands of a broker.
The time to diversify is before the crash.
Be prepared to go on offense.
Diversification is not just a defensive strategy. It gives you some offensive capability, too. Diversification allows you to take advantage of investment opportunities as they arise. With an array of assets in your portfolio, you could have something overpriced in your portfolio you can sell to by reduced-price assets. This process helps you stay diversified, pruning assets that could outgrow your portfolio ratios while concentrating your position in underpriced asset classes.
Diversify against tax risk.
Congress can change income tax rates at any time. They just passed a large tax cut at the end of 2017. The $1.3 trillion omnibus spending bill passed in March of 2018 will have to be paid for somehow, and it is probably not going to be offset with spending cuts. Now may be a good time to beef up Roth IRA holdings, convert Traditional IRA assets to Roth IRA for tax-free growth, and even establish a Roth Solo 401(k) option for your business.
Self-directed investing supports all these options. Roth IRA assets help insulate you from future increases on income and capital gains taxes.
Those of you with “jumbo” Self-Directed IRAs – those worth about $5 million or more – may be especially at risk of future income tax increases.
To learn how to get started attaining true diversification using Self-Directed IRAs and other retirement account strategies, call American IRA, LLC today at 866-7500-IRA (472).