When investors flock to Self-Directed IRAs, they often like the fact that they can invest in a wide range of potential retirement assets. That includes real estate and precious metals. But some of the most spectacular gains for investors have sometimes come from investing in private companies. Like any investment, investing in a private company comes with its own risks. It is certainly its own field of knowledge. But for an investor with knowhow and the ability to perform due diligence, investing in a private company with a Self-Directed IRA can be a powerful way to build wealth for retirement.
However, it is also worth noting that many people have different ideas about Self-Directed IRAs for investing in private companies. To clarify, we thought we would dispel some of the myths and address the facts behind using a Self-Directed IRA to invest in private stock.
Myth: The only good companies are public companies.
Fact: Well, there are good companies all over—but we cannot and do not tell you which they are, because we do not make specific investment advice about using a Self-Directed IRA for private companies. However, it is worth noting that companies as large as Microsoft and Google were, at one-point, private companies unavailable for public investment. That’s why it’s so important to understand why private companies can be such a lucrative asset class. However, that is not to say that they are without the risks. Even so, there are new companies formed all the time—it is the job of the Self-Directed IRA investor to identify them.
Myth: Private stock is impossibly illiquid.
Fact: Private stock is not a highly liquid asset, true. But the convertibility of private stock to cash within an IRA can also depend on certain factors. It is true that selling private stock is not always as easy as selling a portion of public stock, where you can simply turn to the public stock market, execute a trade, and be finished with it before you have had your morning coffee. When comparing many private stock sales to that, it can be more difficult. However, there are still varying degrees to which your private company stock can be considered “liquid.” For many people, holding private company stock is a long-term play that does not require a high degree of liquidity. It is important to understand the degrees of liquidity and how easy it may or may not be to sell the company stock you purchase.
Myth: Private companies are nearly impossible to invest in.
Fact: These days, technology is bringing greater and greater access to a wide range of investors. It may have been the case in years past that it was very difficult to secure a private company investment because it was so hard to identify the opportunities. But these days, there is more research on different platforms available than ever. And investors who take advantage of the availability of online research can always make better decisions when they do their own due diligence.
With Self-Directed IRAs, it is possible to open up new worlds and avenues for investing. This does not mean, however, that it is a guaranteed success. Because you will be the one calling the shots, the success of a Self-Directed IRA private company portfolio will be up to you and your own decisions. A Self-Directed IRA administration firm like American IRA can help facilitate the paperwork and administer the account, but you are the one making the financial decisions. That puts a lot of power in your hands as the retirement investor.