How to Increase Your Portfolio’s Resilience During the COVID-19 Pandemic
Given the unprecedented volatility of the recent stock market, some investors are worried about their retirement plan investments. However, investors who have chosen to invest outside of the stock market are less concerned. They are invested in non-traditional investments. After all, investments beyond stocks, bonds, and mutual funds can be held in an IRA.
Some investors choose to invest in alternative assets such as real estate, precious metals, notes, or other investment vehicles that operate independently of the stock market. Investing in alternative assets gives investors the opportunity to create truly diversified, thus more resilient, portfolios.
Contemplating diversification at a deep level requires thinking about how assets will react in relation to one another and to the broad spectrum of current events. For instance, the rise and fall of the U.S. stock market tends to move large and small-cap shares up or down at the same time.
Owning a variety of assets mitigates risk, and protects your nest egg. Gold has a track record of moving in opposition to the stock market: when markets are down, gold prices rise and vice versa. However, gold is just one of several precious metals investors with self-directed retirement plans can invest in.
Self-directed retirement plans are an open architecture platform. They allow the plan participant or IRA holder to find and conduct due diligence on investments of their choosing and hold it in under their retirement plan. This is in contrast to many other retirement product offerings, where clients are limited to the investment offerings of the platform provider. Examples include: banks that offer CDs, savings accounts, and money market accounts; broker dealers offering stocks, bonds, and mutual funds; and insurance companies that offer annuities.
In a self-directed retirement plan, no investments are offered by the platform provider. Clients find, choose, and vet their own investments. The services the platform provides are the essentials: the documents to establish the retirement plan, and recordkeeping (IRS reporting). The platform also provides custody services, the holding of investments by an approved entity, which are essential to preserving the tax favored status of the account.
Self-directed administrators are not a fiduciary of accounts, they do not provide tax or legal advice. It’s best for retirement plan holders to involve their tax, legal or investment advisors to help them navigate the process and make informed decisions.
Like other retirement plans, self-directed retirement plans are subject to the Internal Revenue Code (IRC). Since it is more likely for individuals to engage in activities that are considered conflicts of interest, it is best for investors to understand the prohibited transaction rules under IRC 4975. The FAQs on the IRS website address relevant tax payer questions.
To learn more about opening a self-directed retirement plan of your own, start here.