Historically, the stock market will generate positive returns for investors over the long-term, with “long-term” being defined by 10+ years. If you’re confident in your portfolio allocation, one bad month shouldn’t cause you to change course.
It’s only natural for investors to wonder if they are over-allocated in equities after a large stock market drop. After the bull market of the last six years, many investors have become accustomed to a steadily rising market. For newer investors, in particular, this may be their first opportunity to assess their risk tolerance in a falling market. Investors who have a 90%+ asset allocation in equities are likely a little bit uneasy at the moment.
Real Estate as an Alternative Asset
If you’re an investor over-allocated in equities and looking for an alternative, we suggest that you consider real estate. Let’s be clear – real estate investing carries its own risks. No form of investing is risk-free, and generally the greater the potential returns, the greater the potential risk of loss. This goes in the stock market, in real estate, and everywhere else.
Real estate investing, though, offers features that investors who are concerned about stock market volatility might be attracted to. While there obviously can be downturns, real estate (or more precisely, the land underneath a property) is generally an appreciating asset. Even when the real estate market suffers a downturn, housing values will not plunge 5% in 5 minutes. The stock market is subject to high-frequency trading, which has only exacerbated the volatility of the market. These “flash” crashes and recoveries usually have nothing to do with the strength of the underlying businesses, which can be frustrating for more conservative investors. Real estate valuations are generally much more tied to the fundamentals of a property and market.
The Advantages of a Self-Directed IRA LLC
Tax Advantages: With the Self-Directed IRA LLC, you have all the tax advantages of traditional IRAs, as well as tax deferral and tax-free gains. All income and gains generated by your IRA investment will flow back to your IRA tax-free. By using a Self-Directed IRA to make investments, the IRA owner is able to defer taxes on any investment returns, thus, allowing the IRA owner to benefit from tax-free growth. Instead of paying tax on the Self-Directed IRA returns of an investment, the tax is paid only at a later date when a distribution is taken, leaving the investment to grow tax-free without interruption.
Investment Options: With the Self-Directed IRA LLC, you can invest in almost any type of investment, including real estate, private business entities, tax liens, precious metals and commercial paper tax-free!
Diversification: With the Self-Directed IRA LLC, you can invest in almost any type of investment, including real estate, allowing you to diversify and better protect your retirement portfolio.
Checkbook-Control: With a Self-Directed IRA LLC, you have even more advantages, including what’s called Checkbook-Control. As manager of the Self-Directed IRA LLC you will have the ability to make IRA investments without seeking the consent of a custodian. Instead, all decisions are truly yours.
Access: With a Self-Directed IRA LLC, you will have direct access to your IRA funds allowing you to make an investment quickly and efficiently. There is no need to obtain approvals from your custodian or deal with time delays in awaiting approval from your custodian or pay any review fees.
Speed: With a Self-Directed IRA LLC, when you find an investment that you want to make with your IRA funds, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account to make the investment. The Self-Directed IRA LLC allows you to eliminate the delays associated with an IRA custodian, letting you act quickly when the right investment opportunity presents itself.
Lower fees: Another advantage to a Self-Directed IRA LLC account is that you can save a lot of money on custodian fees. With the Self-Directed IRA LLC structure, you will not be required to seek custodian investments when making IRA investments allowing you to eliminate custodian transaction fees and account valuation fees.
Limited Liability: By using a Self-Directed IRA LLC with “Checkbook Control, your IRA will benefit from the limited liability protection afforded by using an LLC. By using an LLC, all your IRA assets held outside the LLC will be shielded from attack. This is especially important in the case of IRA real estate investments where many state statutes impose an extended statute of limitation for claims arising from defects in the design or construction of improvements to real estate.
Asset & Creditor Protection: By using a Self-Directed IRA LLC, the IRA holder’s IRA will be protected for up to $1 million in the case of personal bankruptcy. Also, most states will shield a Self-Directed IRA from creditors’ attack against the IRA holder outside of bankruptcy. Therefore, by using a Self-Directed IRA LLC, the IRA will generally be protected against creditor attack against the IRA holder.
REIT Correlation with Equities
This is another advantage that real estate crowdfunding (and other forms of direct real estate investing) has over publicly traded REITs. Large REITs such as General Growth were not immune from yesterday’s selloff. As we’ve previously mentioned, the stock performance of REITs correlated with the stock market nearly 80% of the time from 2007 to 2013, up from 47% between 1980 through 2006. REITs certainly have their positives, but it’s hard for them to act as a diversifier in one’s portfolio when 80% of their price correlates to the broader stock market.
Of course, the real estate market is not unaffected by broader market trends, and no one can predict if this stock market drop will be a blip or the start of a longer bear market. Commercial Property Executive notes that “even institutional investors have been known to up their allocations in real estate in the face of a weakened stock market,” and speculates that commercial real estate and larger residential properties will benefit while the single-family market will suffer. We won’t hazard a guess as to what the market will do.
We will say, though, that if you’re finding that you’re over-allocated in the equities market, you should consider real estate as an alternative.
Real estate may provide your portfolio with a buffer to allow you to weather the falling stock market, and can help you weather the storm until a bull market returns.