A traditional money market IRA comes with a considerable amount of risk. As most of us remain skeptical of the stock market and its long-term outlook, would you trust throwing most of your retirement funds into the stock market?
While stocks tend to generate high returns over the long run, they are beholden to the effects of market fluctuations. On the other hand, bonds remain considerably safer but produce low returns over the long run. If only there was a way to achieve high returns on your retirement account while also shielding yourself against volatility and risk.
Fortunately, there is when you convert your IRA funds into a self-directed IRA (SDIRA). SDIRAs offer a plethora of alternative assets that you can invest in, including real estate, precious metals, you name it.
SDIRAs are not without their risk, and directing them requires savvy and due diligence. But an SDIRA is a necessary step toward diversifying your retirement portfolio.
So, what’s so important about diversifying my retirement funds, and how can an SDIRA help me achieve this?
What is a Diversified Portfolio?
First, before we answer these questions, we need to define our terms. Diversification is a rather broad term, although we can take it to mean investing in alternative assets.
Most IRAs limit investment to a single asset class (i.e. bonds, ETFs, and stocks). SDIRAs offer plenty of alternative asset classes, from purchasing real estate to investing in cryptocurrencies, to achieve diversity.
Sure, investing in different ETFs and bonds could be considered diversifying, but market indexes and stock markets tend to follow much of the same patterns. With an alternative asset class, you are investing in an asset completely tied to a different market.
Benefits of True Diversification
Many brokers stress the word diversification so much because it’s a smart investment decision, especially for retirement accounts. A diversified portfolio with wide-ranging latitude into different asset classes has the potential to shield your money from risk while still producing high returns.
Different financial instruments like REITs, precious metals, and even business equity might be wholly unaffected by stock and bond market crashes. While a bond market may not achieve you substantial net losses in case of a crash, different assets like investing in dividends payers and REITs are comparably as safe and produce much higher returns.
Perhaps the best reason to seek diversity in your portfolio is to reduce your workload. While it requires lots of research and action to invest in different asset classes, managing a diverse portfolio will not require as much work.
A diversified portfolio allows you to sit on stocks that may fall in the event of a crash and continue to collect returns on other assets. You don’t need to move your entire retirement account around to salvage your funds, and you can continue to sit on the asset until it eventually rebounds.
Investment Options Available
So, what investment options do SDIRAs offer? A better question would be, what don’t they offer? Essentially, all assets are openly available that do not indirectly benefit you or qualify as “self-dealing.” For example, you can’t purchase or sell your home using an SDIRA, and you can’t rent out a vacation home you bought with an SDIRA.
Besides this, your investment options are open from everything, including copper, down to Bitcoin. It’s also important to note that traditional assets like stocks and ETFs are also available in an SDIRA.