Founder/CEO of Next Generation Trust Company, a trust company specializing in custodial & administrative services for Self-Directed IRAs.
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At the time of this writing (mid-July), inflation is at the top of the mind of most Americans. Bloomberg economists estimated that the consumer price index rose nearly 9% in June 2022 compared to June 2021—the highest in 40 years. And 40 central banks around the world—including the Federal Reserve in the U.S.—have raised interest rates by at least 75 basis points to try and stem inflation.
In addition, millions of Americans have watched the value of their stock portfolios plummet rapidly since January, giving so many people—especially those approaching retirement and those already retired—more to worry about when it comes to retirement income security.
However, one way individuals can combat this issue is by holding investments in certain asset classes that perform well even during inflationary times—in particular, hard assets.
You can build a hedge against inflation and a more diverse portfolio with hard assets. The stock market is intangible to many investors—it’s just numbers on a statement. As we have seen in the first half of 2022 (and in 2001 and 2008), those intangible numbers experience tremendous volatility that can take years to bounce back.
Hard assets are more tangible investments with several benefits over soft assets like stocks and bonds for several reasons. Based on my own experience:
• They are typically long-term investments and can ride out economic cycles while maintaining their value.
• Hard assets tend to not correlate to the stock market and the valuation of publicly traded assets.
• They usually deliver returns in alignment with inflation.
• Hard assets tend to perform well during periods of high interest rates.
• Their utility in the world can contribute to their sustained value.
• Any value erosion is usually slower than in the stock market.
Types Of Hard Assets Worth Researching That Can Be Included In A Self-Directed IRA
Except for collectibles, artwork and insurance policies, the field of allowable investments within self-directed IRAs is quite broad.
One thing these hard assets have in common is that they invite investors to think creatively (and more long-term) about their portfolios. I have written about some of these specific asset classes in the past, but some examples include:
Real Estate: In my experience as an avid real estate investor, these investments are typically income-producing, such as vacation property, raw land, commercial buildings, rehabs, multifamily properties and farmland. I also know of individuals who have purchased shares in real estate investment trusts (REITs) or lent money in the form of a mortgage note.
Precious Metals: This class includes gold, silver, platinum and palladium—as coins or bullion—that meet a minimum fineness or weight. Palladium is relatively rare and is used in manufacturing, so in my opinion, it is in demand and valuable.
These assets are typically bought and sold through a dedicated precious metals dealer of the investor’s choosing and are held in a third-party depository that specializes in these assets, also selected by the investor.
Because there are many types of coins from around the world that may be included as a precious metals investment, investors are advised to research the available legal options through a trusted dealer.
Commodities: From agriculture to energy assets, commodities fill basic needs that can buoy their value over time. Commodities values fluctuate daily, so this investment class requires knowledge of global markets and trading in futures. Commodities do well during strong economic periods and hold value during a recession because they are the raw materials the world needs to operate.
Commodities may be crops, livestock and natural resources (such as oil or natural gas).
• Agricultural investments: This can include timber farms and logging operations, coffee plantations, cotton farms, dairy farms and more. There are investing platforms for individuals to invest in cattle and other agricultural assets. The self-directed IRA makes the investment, the farmer or rancher raises the livestock (or crops) and the investor receives the sale proceeds.
• Energy rights and resources: Self-directed investors can invest in mineral rights on the land being explored for oil or gas extraction potential or invest in refineries and drilling companies. The IRA owner may also invest in and hold surface rights to the land, and royalty interests in oil and gas resources or their revenues.
Alternative Energy Sources: Self-direction enables direct investments into assets or companies in the sustainable energy space. This includes solar power, wind, hydroelectric power, biofuels and geothermal energy assets.
Equipment Leases: A self-directed IRA can invest in equipment leasing funds, which purchase heavy equipment and then lease it to the business that needs it. The equipment can be tools, a fleet of vehicles, industry-specific equipment or even office furniture.
The lease provides a reliable income stream to the retirement account and the leasing fund, as the equipment owner has a fallback should the customer fail to make the monthly payments (repossession and re-leasing). The self-directed IRA can opt to take an equity position in the fund or lend money to the fund or a business owner.
Hard Assets And Self-Directed IRAs
Self-directed IRAs can open the investing door to a much broader selection of assets within a retirement plan. Doing so can provide a hedge against stock market volatility and can help account owners meet long-term investment goals with assets they know and understand.
Like their typical counterparts, self-directed IRAs create a tax shelter for the owner, who will not pay personal capital gains on the investment when filing a federal tax return. Rather, any gains the investment generates go back into the IRA, tax free.
As with any self-directed investment, it is wise for the account owner to conduct his/her own due diligence on any investment and have a true understanding of the asset before considering self-direction as a retirement strategy.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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