It’s every investor’s big fear: the stock market crashes, and your money is left inside. You do not want to sell and realize the big losses, but you are worried about putting more money aside for retirement while the markets only continue to head down. But there’s good news: if you use Self-Directed IRAs, a recession can be a unique opportunity to put yourself in position to realize big gains over the long term. Here’s what you will need to know.
Is Real Estate “Recession-Proof”?
By owning real estate within Self-Directed IRAs, you have a unique opportunity: making full use of one of the most valuable asset classes available, which tends to provide a hedge against a recession. What’s more, buying real estate during a downturn can be one of the best decisions you can make, provided that you’re calculated about the investments.
“When prices fall, the question is not really how low can they go?” writes The Balance. “The question is how much real estate can you buy before prices go back up.”
There are some factors to consider, however. For example, interest rates—which will likely come down during a recession—can give you more purchasing power as the recession goes on. The Balance notes that “Each 1/2-point increase in your interest rate gives you $25,000 less in purchasing power.” This is one reason that the markets are so eager to see low interest rates—the cheaper the loans are, the more one can afford to leverage capital towards expanding their retirement assets.
Precious Metals Holding Value During Recessions
Many investors point to the historically low returns of precious metals like silver and gold and say they make poor long-term investments. But this is a misunderstanding of the nature of precious metals within a Self-Directed IRA portfolio. Metals aren’t conventional “investments” like real estate or stocks. Instead, precious metals are intended to be stores of value, which is especially important during economic turbulence. For instance, during the Great Recession, precious metals quickly took off—with gold eventually reaching a high of $1,900.
At the very least, precious metals serve against inflation. They won’t generate cash flow like real estate, and they won’t return dividends like some stocks, but they can be an important way to diversify a portfolio and ensure that you do not lose as much value as you otherwise might. This helps Self-Directed IRA investors keep cool heads and make rational investing decisions even when the economic outlook is bad.
Should Investors Keep a Strong Cash Position?
Obviously, one of the best ways to set yourself up for success when stocks are low is to have cash available. Using that available cash during a stock downturn can help you secure stocks at “discount” prices.
But is this always a mindful strategy? After all, maintaining a large cash position since 2008, for example, would have meant that you missed out on the extraordinary returns of one of the longest bull runs in history. And keeping money in cash means that cash will eventually dwindle as its value is lost to inflation.
It’s far better for investors to maintain a healthy portfolio full of diversified assets. Using Self-Directed IRAs does not prohibit people from making well-timed investments during a recession or a stock downturn. But being in a position to handle everything that life throws at you should also mean having the well-rounded assets necessary to feel financially secure in just about any economic environment.