For many people, moving to a Self-Directed IRA for retirement purposes is a great idea because it means that they can try out nontraditional assets like real estate, precious metals, and more within a retirement portfolio. It is a great way to hedge against inflation and diversify a portfolio beyond the typical offerings of stocks and bonds. But is it inherently riskier than a traditional approach? After all, doesn’t it feel comfortable to work through an employer plan, where the investment options are laid out in front of you?
The truth about your risk tolerance and a Self-Directed IRA is a little more complicated than that. An IRA, after all, is a way for you to choose your own path to retirement. That means that you can take on a heavy amount of risk with bold choices, or you can create your own portfolio with a conservative, low-risk mindset. Essentially, you are in charge. And when you work with a highly qualified Self-Directed IRA administration firm, you can have confidence that the administration of your IRA will be well in hand.
But what should you know about risk tolerance for a Self-Directed IRA? Here are a few key points to keep in mind:
- Working with a reputable Self-Directed IRA administration firm helps reduce your risk. This is not to say that a Self-Directed IRA administration firm will choose a low-risk portfolio for you; that is not what they do. But if you have questions about other types of risk, such as poor administration, then working with a reputable Self-Directed IRA administration firm will help. You will have confidence that you are working with people who handle the proper reporting and paperwork behind every transaction, giving you the confidence to invest.
- Different assets have different functions—and different risk profiles. Let us say you acquired a Self-Directed IRA for the purpose of investing in precious metals. A Precious Metal IRA can be low risk when you view things from a long-term perspective. After all, one of the major appeals of gold and silver is that they tend to hold on to their value over a long enough timeline. But that does not mean you will be immune from short-term swings in the prices of these assets. You have to understand what it is you’re getting into with each asset class, understanding that real estate has different risk profiles than precious metals, and so on.
- You will be free to create your own portfolio risk. When you use an IRA, you are choosing your own investments. A Self-Directed IRA administration firm will help facilitate and administrate them, but they will not serve as your investment guru. That is against regulations. That means that you are in charge of creating the risk—or lack thereof—in your own portfolio. For many people, this is a distinct advantage. Maybe they have another traditional retirement account where they use a relatively conservative risk profile. In that case, they may turn to a Self-Directed IRA for the bolder portion of their retirement plan. Ultimately, it is up to you.
When you understand these core ideas, you will be much closer to understanding the possibilities of investing in a Self-Directed IRA. When a MarketWatch opinion piece talked about how Self-Directed IRAs aren’t for everyone, it’s true. But if you do want to customize your own risk profile by creating your own retirement portfolio—choosing nontraditional assets along the way—then an IRA may be the way to go.