A 'self-directed IRA' (sometimes referred to as a 'Super IRA') is simply an IRA invested with a custodian that allows you to take advantage of the widest possible spectrum of investments in planning for your retirement. The vast majority of Americans with IRAs invest in traditional investments. Consider the following data from the Investment Company Institute. At the end of the 3rd quarter 2008:
- 47% of IRA assets were invested in mutual funds
- 38% were invested in securities held in brokerage accounts
- 8% were invested in assets with life insurance companies (most likely annuity products)
- 7% were invested in assets at banks and thrift deposits (like CDs and other savings products)
This data reveals the fact that very few Americans are aware of the fact that they have investment options for their IRAs beyond traditional mutual funds, CDs, and individual securities held in a brokerage account. In fact, other research has shown that fewer than 1% of IRA account holders take advantage of the wide range of investment alternatives available to them, including, but not limited to:
- residential rental property
- commercial property
- land
- private mortgages
- personal loans
- options to purchase real estate
- small businesses
This is not to suggest that IRA investors should abandon traditional investments for these types of alternatives. Not at all! No, this is not an 'instead of' investment strategy. It is an 'in addition to' strategy! Why is it important to seek other alternative investments for an IRA? For three simple reasons:
- Control - Too many investors rely too much on 'the way things have always been done', meaning they continue to roll over the CD at the bank, even though their retirement nest egg isn't keeping up with inflation, or they continue to rely too much on mutual fund and common stock investments, even though they're exhausted trying to determine which market sectors will outperform others, or when the stock market will recover at all! Again, these and other types of traditional investments aren't necessarily bad choices. However, there are many outstanding investment opportunities right in your own backyard, that you can drive by and may know firsthand! Why not take advantage of them? Or at least learn more them as possibilities for your portfolio?! Consider this important point: Many self-directed IRA investors choose investments based on a particular expertise they have. In other words, they invest in what they know!
- Diversification - With so many alternative investments available to consider, it's only prudent to consider them as additions to your portfolio. What about the undervalued lakefront condominium with great rental potential that's selling for half the price of a few years ago? Or the person who's trying to sell the local lakefront property who needs a short term loan until it sells? Or the small business that you and your brother want to start but can't for lack of start-up capital? Like any investment alternatives, some of these examples carry greater risk than others. But all of them, and countless similar examples, offer the potential for excellent investment returns, as well as greater diversification from the typical choices most investors make. Keep this in mind: there are only three investments that you cannot make in your IRA according to the law. Those are collectibles (like art and antiques), life insurance contracts, and stock in a Subchapter S Corporation. Every other type of investment is allowable in your IRA!
- Growth Potential - During those times (and yes, they do happen) when the stock market isn't performing well, and fixed investment returns barely keep up with inflation, wouldn't it be great to have an investment in your retirement portfolio that 'marches to the beat of a different drummer', that can give you some peace of mind that your nest egg is still growing even though your traditional investments are sputtering along?!
The bottom line? For me there are two:
- Don't abandon the 'traditional' investment choices of stocks, bonds and cash, as found in mutual funds, exchange traded funds or individually, via brokerage accounts.
- However, DO diversify your investments to include other types of investments, including real estate and other alternatives.
