Asset Diversification in Reducing Risk to your Portfolio

Asset Diversification in Reducing Risk to your Portfolio
Five alternative investments to consider for your IRA

Until recently, many average investors limited themselves to investing in stocks and bonds within their retirement plans. Only high-net worth clients were taking advantage of investing in alternative assets within their retirement plans, specifically Individual Retirement Accounts (IRAs). The most famous example of alternative assets used to fund an IRA to exceptional effect is the 2012 Presidential candidate, Mitt Romney. He invested in private shares and the investments of his company, Bain Capital. As of 2010, the value of his IRA was between $20 million and $100 million.

Now, the average investor, seeking diversification in their portfolios, are turning to alternative assets to stocks and bonds. This article discusses five popular non-traditional assets that the IRS permits in an IRA.

Real Estate:
The most popular non-traditional asset is real estate. Investors can invest in rentals properties where the rent grows tax free, or flip houses, purchase foreclosures, or purchase foreign property.

Precious Metals:
Since the 2008 Great Recession, precious metals, particularly gold, are becoming an alternative to conventional assets, such as stacks and bonds, to protect the value of their investments against a weakening dollar, geopolitical uncertainty, inflation and deflation, and as part of a diversified portfolio. The IRS has limited the type of precious metals allowed in an IRA. For example, only gold that has a .995% purity are allowed in an IRA.

Promissory Notes:
A promissory note is a written agreement between you and another party to loan a specific sum to be paid back at a specific date in the future. There are two types of promissory note: secured and unsecured. A secured note is note backed by collateral, and an unsecured note is not backed by collateral and the interest rates on these loans tend to be higher than secured loans.

Tax Liens:
Yes, tax liens are allowable assets within an IRA. A tax lien is a legal claim by a government entity against a non-compliant taxpayer’s assets. When you purchase a tax lien, you are purchasing the right to collect the outstanding taxes. Once the tax lien has been purchased, you only have to wait until the delinquent taxes are paid. If these taxes go unpaid for three years, you will have the right to take possession of the property through foreclosure.

Venture Capital:
Venture capital is money provided by an investor(s) to start-up firms and small businesses with perceived long-term growth potential. Most venture capitalists invest for long-term capital growth, not for income. Therefore, a Roth IRA is suitable for this type of asset because capital gains are tax-free. You must be aware that the IRS prohibits “self-dealings,” that is, using their IRA assets to benefit them or their family before you retire.

How to invest in alternative investments within an IRA
Not all IRA providers have the administration to deal with alternative assets. Only specialist custodians have the expertise to establish self-directed IRAs. Alternatively, if you wish to have direct access and control of your assets, you can use the IRA LLC model offered by providers such as MyDirect IRA.

Since the stock market fluctuations of 2008- 2010, and most recently in our new Covid era, many investors have lost confidence in the stock market and wish to diversify part of their portfolios away from stocks. Not only do they want asset diversification within their portfolios, they also want to invest in assets they know. Investing alternative assets within an IRA is not a new investment strategy, as Mitt Romney has proved. In fact, the legal basis of self-direct investing passed in 1974. It has only been recently, however, that this investment strategy has become mainstream.