According to angel investor Naval Ravikant, “if you don’t own a piece of a business, you don’t have a path towards financial freedom.” This might sound like a blanket statement, but for many investors, it can seem that way. After all, building financial independence even with a wide variety of stocks in a mutual fund means that you own a piece of many businesses. For that reason, even Self-Directed IRA investors look to build their long-term equity by putting money aside in a business. However, with a Self-Directed IRA, the options for doing so are even more numerous.
What does it mean to invest in a private business with a Self-Directed IRA, and what is the potential upside of doing so? Let’s take a look at some reasons investors like using a Self-Directed IRA for private business, sometimes referred to as a “Private IRA.”
Potential Upside: Aggressive Returns within a Self-Directed IRA
The most important reason angel investors reach out to businesses that are still private is that these businesses have the potential to create the most long-term upside for the investor. For example, if you had invested in Amazon during its IPO, you would have done very well. According to Investopedia, a $10,000 investment at that time would yield some $12,000,000 now—growth of 120,000%. That might sound astounding, but it’s even less than what investors who got in on Amazon before the IPO would have gotten.
The reason for this is that by investing in Private Companies, you can reach them at their point of least value. The problem is in determining which companies have enough juice to become the next Amazon or the next Uber. That’s not always so easy. But it is possible to include your investing in Private Companies within a Self-Directed IRA.
Potential Upside: Understanding the Marketplace
Even if you do not make many private company investments, the research necessary to look at potential business opportunities can hone your skills as an investor. Consider all of the investors who look through a constant-changing list of potential startups. Many of these investors may never put money into a private business. However, their ability to view and review these businesses helps them determine which ones have the legs to last longer in the future. And as investors take more control into their own hands—such as through using a Self-Directed IRA—they start to exercise muscles that they may never have had before.
Potential Upside: Diversification
It’s one thing to have a well-diversified set of stocks in the marketplace. But that can only get you so far. At some point, having all of your assets in one asset class can expose you to certain risks. For that reason, many financial experts recommend diversifying your assets. And using private company stock is one way to do that in a way that doesn’t always necessarily correlate with what the stock market is doing on Wall Street.
You’ll be the one choosing your own level of asset class diversification. But what you’ll want to do is understand how it works. Not only are you investing in Private Companies, but you’ll have the ability to do other things with a Self-Directed IRA, such as invest in real estate, precious metals, and more. And the more you understand the role diversification can have in a retirement portfolio, the more well-rounded of an investor you’ll be, even if it’s only having knowledge of what diversification is.