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Retirement Investors Keep Their Eye on Alternative Assets

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  |  By Curtis Glovier

The US equity bull market is on track to celebrate its ninth birthday in early 2018, but surging stock levels aren't deterring self-directed retirement investors from diversifying their portfolios with alternative assets.

As I write this blog in mid-December, the S&P 500 Index and the Dow Jones Industrial Average have closed at record levels four sessions in a row. But according to PENSCO’s annual survey,* where we ask clients about investment plans for their self-directed IRAs, 59% of respondents said they plan to maintain or increase their allocation to non-traded alternative assets over the next five years. This is in contrast to the 13% who said they will likely decrease their exposure to alternatives.

Self-directed IRAs allow investors to expand their asset allocation beyond plain vanilla, traditional exchange-traded assets like stocks, bonds and mutual funds to invest in alternative assets such as real estate, private equity and promissory notes. Our annual survey offers a glimpse into how clients are approaching asset allocation and positioning their self-directed IRAs ahead of 2018.

The following are three reasons I believe our clients are keeping their investment focus on alternatives despite ongoing stock market advances.

1. Investment experience. The average age of a PENSCO client is 63 years old. They are experienced investors who have seen bull markets come and go, helping them avoid the pressure of chasing potentially fleeting stock market gains.

2. Memories of market volatility. Retirement investors have not forgotten the volatility that rocked the stock market in 2015 and early 2016. Our 2015 client survey found almost 62% of respondents said they had increased their allocation to non-traded alternative investments or planned to do so given 2015's market volatility. Investors who are closer to retiring typically have less of a tolerance for unpredictable market swings because there is less time for their portfolio to recover from losses.

3. A preference for alternative assets. Many PENSCO clients choose self-directed IRAs for the specific purpose of investing their retirement funds in alternative assets—an option not typically available in IRAs offered by traditional banks or brokerages. Our clients' interest in non-exchange-traded assets is often driven by their expertise or personal knowledge in an industry, such as real estate. This is the often-touted investment principle of “invest in what you know.”

What did we learn about where PENSCO clients are investing their retirement funds? A considerable number said they are likely to increase their holdings of real estate, private equity and notes. Almost half of the survey participants said they are likely to increase their retirement portfolio allocation to real estate, while 27% said they are likely to boost their allocation to private equity and 18% said they are likely to increase their investment in notes.

PENSCO clients cited the following reasons as the most important benefits of investing a portion of their IRA dollars in non-traded alternative assets: 

Most Important Benefits of a Self-directed IRA from PENSCO Clients

By using a self-directed IRA, our clients put themselves in the driver's seat when it comes to managing their retirement investments. The responsibility for identifying an investment and making investment decisions lies with them—or an agent they've designated to act on their behalf. Given this, 44% of our survey respondents seek the advice of a financial advisor when evaluating alternative assets, while 40% said they work with an accountant and 39% said they seek the advice of a real estate professional.

At PENSCO, we strongly encourage our clients to work with tax, legal or investment professionals before making any investment decision. For investors seeking guidance, our Professional Directory lists professionals, such as attorneys and CPAs, who specialize in self-directed IRAs and may be able to assist you with investing in alternatives.

* These findings are based on a Q4 2017 survey of 913 clients who custody retirement assets in self-directed Individual Retirement Accounts (IRAs) with PENSCO.

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.