Real Estate News and Market Moves Week 116

Five reasons to use a self-directed IRA for alternative investments

This week’s blog post comes to us from Inspira Financial as part of next week’s webinar collaboration. Our Founder, Tyson Schuetze, will be presenting “An Investor’s Journey: Moving from Active to Passive in Residential Rental Investments” on Monday, August 25th at 6PM (CST). He will also be joining Inspira Financial’s panel, “Investing in Residential Real Estate” on Thursday, August 28 at 12PM (CST).

You can register to join here. We look forward to seeing you there!

Are you looking to invest beyond the basics?

In recent years, alternative investing — investing in assets other than basics such as public stocks, exchange traded funds (ETFs), bonds, and mutual funds — has become more accessible. Advances in technology and new investment platforms have made this strategy available to more people. It is no longer limited to just the ultra-wealthy and institutions.

Alternative investing: A time-tested strategy for the ultra-wealthy and institutions

Yale University’s endowment fund is well-known for including alternative assets in its investment strategy. The Yale Investment Office reports on its website that in 1989, almost 75% of the endowment was invested in U.S. stocks, bonds, and cash. Today, domestic marketable securities account for less than one-tenth of the portfolio.

Meanwhile, a recent Goldman Sachs survey of private wealth management firms noted that these investors continue to hold “outsized allocations to alternatives“ with private equity, real estate, infrastructure, hedge funds, and private credit collectively accounting for 44% of holdings.

What those savvy investors have long known about alternative investing is that holding assets such as private equity, commodities, hedge funds, and real estate increases portfolio diversification and may mitigate risk over the long term since these asset classes often have less correlation with public stock markets — which tend to move faster and can be volatile.

Adding alternative assets to your portfolio can help diversify your investments. Holding these assets in an individual retirement arrangement or account (IRA) can also provide the benefit of tax-free growth.

Here are five reasons to discuss the possibilities with your adviser.

1. Alternatives assets are a large and growing class — while public markets are shrinking

Alternative investments such as hedge funds, private equity, real estate, commodities, marketplace lending, and crowdfunding are becoming more popular. Private market assets under management have been growing nearly 20% per year since 2018 and totaled $13.1 trillion in June 2023, according to McKinsey.

Investors may have an opportunity with this growth, as alternatives are likely underutilized: individual investors hold just 5% of assets under management (AUM) in alternative investments, according to a 2023 report from Bain.

Meanwhile, the pool of publicly traded stocks is shrinking. Less private companies are going public, and less than 15% of companies with revenue over $100 million are publicly held according to a Bain 2023 report — so many investors are looking for a way into equity with innovative new companies.

In short, there may be a lot of untapped potential, and with this changing landscape, many investors are thinking outside the ticker tape.

Alternative investments include anything that isn’t a traditional investment, such as:

– Crowdfunding
– Real estate (real estate investment trusts, rental properties, and commercial real estate, etc.)
– Hedge funds
– Private equity or debt
– Commodities futures

2. Self-directed IRAs hold alternative investments

The tax benefits provided by self-directed IRAs can make them an excellent vehicle for alternatives and can help put retirement savings to work.

But research shows that even investors who own alternatives in brokerage accounts often don’t own them in IRAs, according to a 2021 Inspira Financial survey. For example, while 37% of high-net-worth investors in the study invest in real estate, only 10% do so within an IRA.

See IRS Publication 590A to learn what’s allowed in self-directed IRAs.

3. Alternatives may help your financial adviser use risk to your advantage

In the face of unstable geopolitics, supply chain disruptions, changing tax policies, a barrage of central bank decisions, and other variables, deep investment diversification is generally critical to managing market risk.

Alternatives may be a particularly effective ingredient since they have a low correlation with other asset classes and may provide a ballast during volatile times.

Traditional, Roth, SIMPLE, or SEP IRAs can all be self-directed. The descriptor “self-directed” indicates how investments are managed in the account. When opening an account, the rules and attributes — such as income limits, contribution limits, or required minimum distributions — for the type of IRA opened will still apply. 

These accounts uniquely allow for the inclusion of alternative assets in the accountholder’s portfolio. Investors can access a broad array of alternative assets — such as real estate, promissory notes, or private equity — outside the reach of their standard workplace retirement plans.