For many investors, a self-directed IRA makes more sense than a traditional IRA where you are limited to the types of assets you can hold in your retirement account. The potential returns are greater than with a traditional IRA, but the risks are also larger because of the nature of the investments.

Self-directed IRAs allow investors to hold baskets of alternative investments such as real estate, marketplace loans, gold, and precious metals, hedge funds, fractional investments, private mortgage bridge loans, oil and gas rights, and more. While not for everyone, a self-directed IRA provides more diversity in an investment portfolio and gives the owner more control over their investments. 

While IRAs are great vehicles for retirement planning, they are vulnerable to stock market ups and downs. Self-directed IRAs, on the other hand, have built-in protection against fluctuations. Since that is true, how does the stock market affect an individual’s retirement? There have actually been some studies on that.

The Stock Market and Your Retirement

In March, the S&P 500 hit an all-time high, well ahead of the expected schedule that prognosticators predicted due to COVID-19. On August 29, the index hit its 12th all-time high. The only problem with such highs is that they tend to be followed by downturns. What goes up must come down, as they say.

COVID-19 did more than just present a public health risk. It also caused many baby boomers to leave the workforce sooner than expected. A total of 3.2 million boomers retired early as a result of the pandemic. That means whatever retirement savings they have must last longer, and if the stock market turns while they are retired, that could present a lifestyle hardship for many of them. 

A study conducted by the National Bureau of Economic Research (NBER) on the relationship between stock market performance and retirement intentions concluded that there was a weak negative correlation but that factors other than stock market fluctuations caused early retirement among the wealthy class. The study was conducted in 2010 using data from 1998 to 2008, the height of the financial crisis. Researchers found that individuals more exposed to stock market risk were less likely to put off retirement and that individuals were more likely to put off retirement when the market declines as opposed to retiring early when the market gains. They explain this difference by pointing to risk aversion factors.

When it comes to retiring, what can risk-averse investors do to ensure they don’t lose the investment principle in their retirement accounts while ensuring they maintain their standard of living? One thing they can do is hedge their portfolio against stock market downturns by investing a small percentage of their assets in alternative asset classes within their IRA.

5 Alternative Asset Classes Compatible with Self-Directed IRAs

Alternative asset classes can be used to round out an investment portfolio and the perfect vehicle for doing so is a self-directed IRA. As mentioned earlier, real estate is one asset class often explored within self-directed IRAs. Below are five ways you can incorporate real estate into your self-directed IRA.

1. Traditional real estate investing – Long before financial technology (fintech) and online real estate investing stole the show, real estate investors were buying and selling land, flipping houses, and investing in traditional real estate assets through their self-directed IRAs. This is still a valid investment strategy, though it is limited by geography. To invest in traditional real estate assets, you must be able to evaluate risk and get eyes on the property or trust your investment partners.
2. Fractional investing – While fractional real estate investing has been around longer than the internet itself, the rise of fintech and online real estate investing platforms has expanded fractional investment opportunities and made them more available to more investors. Instead of buying properties outright, investors can own a percentage of real estate assets by pooling their money with other investors. By leveraging the capital of other real estate investors, fractional investors can earn more on their money by diversifying their real estate assets through an online portfolio.
3. Marketplace lending – Marketplace lending has become a unique asset class in real estate allowing investors to choose the deals they wish to invest in through a peer-to-peer marketplace. Real estate developers, flippers, and other professionals seek a loan for project completion and investors provide that loan through a platform designated for that connection. Rather than invest in the property itself, investors lend money to the professional who must then pay back the loan with interest. All investors who participated in the lending process receive back a portion of the interest from that loan. 
4. Private mortgage bridge lending – A bridge loan is a specific type of loan that allows a real estate developer to complete a project already started. Private bridge loans have become very popular in marketplace lending. Investors pool their money to provide a loan to developers and pay back the loan upon project completion. Bridge loans are typically riskier than the average marketplace loan while providing significantly higher returns.
5. REITs and funds – Real estate investment trusts and real estate funds also make great investments for a self-directed IRA. These assets are managed by a company that specializes in these investments. But they can be included in your basket of assets within your self-directed IRA.

While real estate makes a great self-directed IRA asset class, self-directed IRAs come with many rules. For instance, you can’t invest in a product you own. There are also rules about other disqualified persons. As long as you follow all the rules, however, investing in real estate through your IRA has the potential to triple your returns. 

Coming Soon: Your Own Self-Directed IRA on Sharestates

Since February 2015, Sharestates has been committed to improving our underwriting practices, our marketplace offerings for investors, and our service to investors and real estate professionals alike. In 2019, we won the LendIt Top Real Estate Platform Award. We’ve been recognized by industry experts as one of the top marketplace lending platforms or online real estate investing platforms since our earliest days. We’re proud to continue that legacy.

Sharestates is currently in the process of building out capabilities to allow investors to invest in our real estate offerings through a self-directed IRA. If you’d be interested, please let us know and we’ll keep you updated.