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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Retirement Investors Use Alternatives to Foil Volatility

  |  By Christopher Orr, CISP®, SDIP

Editor’s Note: Given the extreme market volatility, we are updating this blog explaining how retirement investors are using alternative assets in their IRAs to foil volatility. We originally published this blog in January.

February’s brutal stock market sell-off, triggered by fears over the global economic toll of the spreading coronavirus, serves as a stark reminder that trading conditions change on a dime, and market volatility can swiftly wallop the market.

On the last trading day in February, wild stock market swings sent the Dow Jones Industrial Average down more than 1,000 points before it rallied around 640 points in the final minutes of trading, according to the Wall Street Journal. The Nasdaq Composite fell as much as 3.5% before bouncing higher to narrowly close in positive territory.

Investors know February’s whipsaw market action isn’t good for their nerves. When it comes to their retirement savings, many are loath to watch their nest eggs get battered by market volatility.

That is why many retirement investors are diversifying their retirement holdings away from stocks by using self-directed IRAs to invest in alternative assets. And these self-directed investors indicate they expect to continue this investment trend in response to market volatility.

Retirement Investing Beyond the Stock Market 

Currently, traditional IRAs assets are invested predominantly in individual stocks and stock mutual funds.[1] But it’s possible to own alternative assets—such as real estate, private equity, and gold—in an IRA by working with a custodian that allows investments in non-traditional assets. IRA owners are only restricted by law from investing in life insurance and collectibles.[2]

As a self-directed IRA custodian, we know that many of our clients choose self-directed IRAs for the specific purpose of investing retirement dollars in alternative assets. Given ongoing bouts of volatility, our annual client survey[3] found that more than 31 percent of our clients plan to increase their allocation to alternative investments, while 32 percent have already done so. The survey also found that 64 percent of our clients plan to maintain or increase their IRA allocation to alternative assets in the next five years.

Natixis Investment Managers’ 2019 Global Survey of Individual Investors echoes our findings. Their survey also finds that market volatility is piquing investor interest in alternatives. Nearly six in ten investors say they are considering investments beyond stocks and bonds given market volatility, while 65 percent indicate they want investment strategies that are less tied to the broad market.

What type of alternatives are retirement investors considering? In our survey, more than 50 percent of respondents said it’s likely they’ll increase their allocation to real estate, while 30 percent said they’ll pursue private equity opportunities. Investors also show interest in notes, peer-to-peer lending, commodities, and cryptocurrency.[4]

The Benefits of Owning Alternative Investments in an IRA 

Investing in alternative assets using a self-directed IRA affords investors multiple potential benefits. The most important one, according to PENSCO’s survey, is diversification and the capacity for alternatives to deliver excess returns while reducing portfolio risk. Investors also value the ability to invest their retirement dollars in businesses, sectors, or industries—such as real estate or natural resources—in which they have personal knowledge or expertise.

The tax advantages of owning alternatives in an IRA are also attractive. Investment returns in a traditional IRA can compound year after year on a tax-deferred basis, while investments held in a Roth IRA may accumulate tax-free.

For investors curious about investing in alternative assets with an IRA, a good first step is discussing the pros and cons of this retirement strategy with your financial advisor. Opening a self-directed IRA is a straight-forward process that can typically be handled by an advisor.

If you move forward, remember that owning alternative assets comes with its own set of risks. Some alternatives are highly illiquid, while others may be hard to value. There are also strict IRS rules and regulations—such as avoiding prohibited transactions and working with disqualified persons—that self-directed IRA owners must follow.

We advise working with a tax or legal advisor who is familiar with the rules and regulations of self-directed IRAs before making any investment commitments. Investment professionals may be able to spot red flags that you overlook and help you avoid penalties and tax consequences if you mistakenly break IRS rules.

Given extreme market volatility, it may be an ideal time to discuss with your financial professional the role of alternatives in your IRA. With multiple risks hanging over the market—from the coronavirus to the 2020 presidential election—it is unlikely that market volatility will fade. Instead, we believe alternative assets will play a growing role in investors’ retirement portfolios as the need to generate returns while managing risk remains a critical focal point.

To learn more about opening a PENSCO self-directed IRA, please call us at 866.818.4472. If you are a current PENSCO client and have questions about your IRA, you can reach us at 800.962.4238.

 


[1]ICI Research Report, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007-2016.” Published September 2018.

[2]https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments

[3]These findings are based on a 2019 survey of 934 clients who custody retirement assets in self-directed Individual Retirement Accounts (IRAs) with PENSCO.

[4] PENSCO does not currently allow direct investment in cryptocurrency (only via indirect investment vehicle or fund).

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.