Despite existing since the traditional IRA was created in 1974, Self-Directed IRAs (SDIRAs) have received relatively little attention over the past few decades. While SDIRAs are functionally the same as traditional IRAs, SDIRAs provide access to significantly more types of investments and give investors the ability to invest in a wider variety of asset classes. Access to these investments permits investors to both increase diversification in their portfolio and focus on investing in areas where they may have more expertise. The reason many investors have never heard of SDIRAs is due in part to most custodians only offering approved investment options like bonds, stocks, mutual funds, and CDOs. For larger custodians, offering every legal investment type can be administratively difficult. This is why smaller, more specialized firms are typically the only ones who offer SDIRAs as an option.
Some examples of the different types of investments available to holders of an SDIRA include:
- Real Estate
- Private Placements
- Private Debt
- Tax Lien Certificates
- Foreign Currencies
Alternative investments are becoming increasingly important within global finance. They possess a set of qualities and characteristics that are easily distinguishable from traditional investments such as being typically long-term, high yield, and illiquid. The rising popularity of non-traditional investments is partially attributed to their solid performance when compared to the returns of stocks and bonds since the 2008 financial crisis. The investment management company Invesco recently launched a new marketing campaign advocating that the ideal portfolio should be 50/30/20 (stocks, bonds, alternatives) versus the traditional 60/40 balance. The graphic below shows some of the returns of alternative and traditional investments along with their correlation to the S&P 500.
With the need for diversification fresh on many investors’ minds, a suitable investment vehicle is needed to facilitate those investments.
In a tax-advantaged portfolio, it becomes especially important to practice sound investing strategies. Holding alternative assets in an IRA portfolio by using an SDIRA provides diversification benefits that allow for safer, more consistent, and theoretically better returns. An investor also receives the additional benefit of having the opportunity to invest in an asset class they might be more familiar with, allowing the opportunity to further improve risk and return. Having tax advantages significantly amplifies the diversification benefits, making SDIRAs an option serious investors must consider if they want to maximize returns.