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By Kelli Click

Since the stock market bottom in March of 2009, we’ve seen the longest bull market for stocks in history. While this has been a boon for investors, no bull market goes on forever. We saw stark evidence of this during the month of December 2018 when the S&P 500 declined sharply. With the rise of stock market volatility, investors will look to their advisors for ways to minimize the impact on their portfolios, especially their retirement assets.  Alternative investments present an opportunity for investors to diversify into investments with low correlations to traditional stock and bond investments.

Why alternatives?

There is a whole investing universe that extends beyond basic long positions in equity or fixed income investments. While stocks and bonds provide a solid long-term core for most retirement portfolios, incorporating alternatives into the mix provides a tool to fine-tune your portfolio.

Many alternatives have a low correlation to stocks, bonds or both. This low correlation can be a real asset to investors in times of market volatility as they strive to control the volatility and downside risk of their portfolios.

The alternative investment options we support here at STRATA Trust include:

  • Real estate
  • Hedge funds
  • Private equity investments
  • Private placements
  • Private corporate debt instruments
  • Debenture offerings
  • Real estate notes and trust deeds
  • Gold and precious metals
  • Crowdfunding
  • Structured settlements

There are a few investments not eligible for IRAs outlined in IRS Publication 590-A and 590-B. These include collectibles such as artwork, stamps, rugs, antiques and some others. Additionally, certain coins and life insurance are also prohibited investments. Beyond these, the range of permissible investments is very broad. A self-directed IRA allows you to tap into the full potential of the investment universe inside a retirement account.

Why use a self-directed IRA?

A self-directed IRA allows for a wide array of traditional, nontraditional and alternative investment options not available in a conventional IRA account. With so many investment options to choose from, you have the flexibility to build a powerful investment strategy — where you call the shots.

Self-directed IRAs are available as traditional and Roth IRAs. Additionally, for those who are self-employed, self-directed SIMPLE IRAs and SEP-IRAs are also available.

Self-directed IRAs allow for direct ownership of many types of alternative investments, as opposed to investing via a mutual fund or ETF that at best provides indirect exposure to these alternative vehicles.

Using a self-directed IRA to invest in alternatives

For financial advisors looking to diversify their client’s retirement holdings and other investment professionals, a self-directed IRA offers a number of advantages:

  • The ability to diversify into investment holdings that may not correlate directly to the stock market.
  • Capital gains are tax-deferred in a traditional IRA and tax free in a Roth IRA (penalties may apply for early withdrawals).
  • Self-directed IRAs may also be an option for individuals who don’t have immediate liquidity needs since many alternative assets have a longer hold period than traditional market securities.
  • Funds are more readily available for investing. Unlike disposable income, retirement account money is usually easier and faster to access once the investor decides to invest.
  • An IRA custodial relationship enhances your fundraising. If you have a relationship in place with an IRA custodian when you approach investors, simply mentioning that you can accept their retirement funds can provide another avenue for an investor to consider.
  • Investors are seeking more alternative investments. With the current economic downturn, it’s no secret that more investors are trading their attraction to the stock market for alternative investments.
  • Increase the perception prospective investors have of you. By informing prospective investors and prospects about the opportunity to invest using their retirement funds, you can provide the valuable knowledge of something beneficial.

Using a self-directed IRA to invest in alternative investments provides another level of diversification for investors. In a market environment where performance faces headwinds from factors such as trade wars and the potential for rising interest rates, investing in alternatives with a self-directed IRA can provide your clients with an edge in an uncertain environment.

STRATA Trust is a self-directed IRA custodian, specialized in holding alternative assets within IRAs.

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