Grow your investments like Yale with a self-directed IRA

VaselineSeptember 9, 2024

0 3 minutes read

Grow your investments like Yale with a self-directed IRA

Endowments such as Yale University’s, which focus on investment alternatives, have been excellent examples of multi-asset class investment strategies over the past two decades. Case in point: The Yale endowment posted $759 million in investment gains for the year ending June 30, 2023, according to its 2022-2023 financial report.

In addition to diversification, alternatives also offer potential investment opportunities that often have a low correlation with volatility in traditional markets.

The Yale Fund has access to top fund managers, but by adopting alternative investment principles, individual investors can design their own portfolios to have the potential to achieve similar risk-adjusted returns. This strategy has paid off for the endowment, particularly when traditional stock and bond markets experience economic fluctuations.

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While one can invest in alternatives in many ways, an often overlooked strategy is to invest tax-advantaged retirement savings. This can be done through an investment vehicle known as a Self-Directed IRA or SDIRA. These accounts are not distinct types of IRAs, but rather, “self-directed” refers to the style of account management, where investors or advisors assume management duties.

Traditional IRAs or Roth IRAs can be self-directed, but the main difference is that with SDIRAs, people can invest in alternative assets. Alternative assets can help reduce exposure to market volatility as many have low correlations with public markets and may be better suited for long-term strategies as many of these assets are less liquid.

Specifically, SDIRAs can hold alternative assets such as private equity, hedge funds, commodities and market loans, but real estate has historically been one of the most popular investments. While there are restrictions on using real estate held in an SDIRA for personal use, you can invest in any type of real estate, including rental property, land and commercial property.

Access to alternative markets

Historically, many alternative assets have required an accredited investor, an investor with special status under financial regulatory laws. However, I have seen many types of alternative investments that do not require an accredited investor. Today, many alternative investments are more widely accessible. So, for example, if someone wants to invest $5,000 in alternatives, they have many options to choose from.

However, the opportunity for greater diversification comes with greater responsibility as the investor must manage the SDIRAs themselves. If managed prudently, this vehicle also offers the opportunity for higher returns due to the wider variety of investment options, especially if you have experience with a particular asset type.

Regular investors often know the market better in the region they live in, so whether it’s real estate or a new restaurant opportunity, if they’re familiar with that particular space, they’re probably more comfortable putting some of their retirement capital. to that investment.

Outlook 2024

Nearly half of Americans are at risk of a financially insecure retirement, up from a third in 1983, according to a 2024 Senate committee report. And as BlackRock CEO Larry Fink pointed out in his 2024 letter to investors: longer life spans mean Americans need to save more money to live into their later years. SDIRAs offer Americans a great opportunity to put their retirement savings to work beyond the standard target-date funds that many 401(k)s favor.

It is essential, however, that you consult a qualified financial advisor. SDIRA gives individual investors the opportunity to match their investments to their risk appetite. However, every investment has its own complexities. For example, some alternative assets have low liquidity, which means that it may be difficult to access or sell them quickly – if at all – without a loss in value.

The IRS also has strict rules regarding transactions prohibited by SDIRA, which are intended to prevent direct personal benefits to the account holder or other disqualified persons, such as family members. (For example, using an SDIRA to invest in a business that is owned by the investor’s spouse.) Prohibited transactions may result in tax penalties or loss of the account’s tax-advantaged status.

SDIRAs can open the door to a wide range of alternative assets with a return model that can benefit the end investor. Ultimately, better access to these investments, which have proven successful for endowments like the Yale fund, gives investors another viable avenue to help grow their retirement savings and improve their overall financial well-being.

This article was written by and reflects the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records with help dry or with FINRA.

VaselineSeptember 9, 2024

0 3 minutes read

Vaseline

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