Look out below. As stories hit the wires that the U.S. saw a massive 32.9% annualized decrease in GDP in the second quarter of 2020, investor fears were triggered, including a selloff on Wall Street as the Dow Jones moved downward. For many people, this is the top news: the effects of the COVID pandemic and how it will impact our lives economically. But how might a Self-Directed IRA help investors who are worried about issues like this? Is it really suited for investors who worry about the GDP? Let us look more closely at the act of self-directing and see how it might help some investors gain confidence.
Priority One for Self-Directed IRA Investors: Diversification
Let’s be clear: A Self-Directed IRA is like any other retirement account when it comes to the rules and benefits on paper. It is just that many IRA or 401(k) plans, such as those through an employer, only offer specific options. But in truth, retirement plans can include investments in certain real estate, precious metals, tax liens, and more. And investors who are aware of this fact may turn to Self-Directed IRAs for some shelter when there is bad news in mainstream economic media.
One example is the GDP. Even as the GDP suffered a spectacular decline thanks to the COVID pandemic, real estate as an asset class remained largely stable—relatively speaking. That is because moves in real estate are somewhat slower to react than other assets. For example, in many places, real estate assets remained highly priced even through the pandemic because the supply dropped along with the demand. This stabilizing can add a lot of certainty to a portfolio, especially a retirement portfolio that is mainly allocated in stocks and bonds.
Diversification is a key point that many investors miss. Many investors look to a broad basket of stocks and bonds for diversification, and while this can be more diversified from a single stock or even a small basket of stocks, it doesn’t offer the true asset diversification that can make a retirement portfolio that much more well-protected, especially when there is difficult economic news.
How Does a Self-Directed IRA Help?
In truth? It does not—not without a plan in place. A Self-Directed IRA is just a tool, after all. And if you do not use that tool, you will not have any added protection from rough economic news.
What matters is how you use the Self-Directed IRA. The first step is to choose a Self-Directed IRA plan—such as a Roth IRA, a Solo 401(k), or a SEP-IRA that makes sense for your situation. This is a great way to make sure that your Self-Directed IRA is in line with your retirement strategy, especially in the way you plan on investing. For example, a Roth IRA is a great way to put aside after-tax money that you can then watch grow in your account.
You should also think about the types of investments you will want to have in your account. Because American IRA is a Self-Directed IRA administration firm, we help by acting as a custodian, but not as an investment adviser. The investments are up to you. And you have a lot to choose from when you self-direct. You can use precious metals, real estate, tax liens, and even a Single Member LLC within a retirement plan. This gives you a tremendous amount of flexibility for diversification and building a broad retirement portfolio.