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Preferred Trust’s Role in Financial Empowerment: Unlocking the Potential of Self-Directed Investments Part 2



Here is a step-by-step guide to help get started on your alternative investment journey with a self-directed IRA.



Understanding Your Investment Goals:

Begin by clarifying your investment objectives. Are you looking for long-term growth, income generation, or capital preservation? Understanding your goals will guide your investment choices.


In my 30’s, my investment goals were different than they are as I am nearing 50. Consider where you are in life. If you plan to retire when you are 70, then maybe your investment goals in your 50s can act younger.


Assess Your Risk Tolerance:

Alternative investments can vary widely in terms of risk and return potential. Evaluate your risk tolerance to determine how much volatility you’re comfortable with and align your investments accordingly.


In reviewing risk tolerance, you have to consider your age as you near retirement. The vast majority do not consider understanding their capital needs as they age. Evaluating your expenses at the moment is not going to work. You need to evaluate based on your life expectancy and then add 10 years.


Educate Yourself:

Take the time to learn about different alternative investment options available for your self-directed IRA. These may include real estate, private equity, hedge funds, commodities, cryptocurrencies, and more.


I am always surprised by how little research is conducted before making an investment. Consider working for a whole year and earning $50,000. This is a whole year of your life that spent. Yet in just a few minutes you could invest this $50,000. Isn’t it worth spending at least a month educating yourself about an investment before you potentially risk one year's worth of work?


Perform Due Diligence:

Conduct thorough due diligence on any alternative investment you’re considering. This includes researching the investment opportunity, understanding the underlying assets or business, reviewing historical performance, and assessing the credibility of the investment sponsor or manager.


Education and due diligence go hand in hand. Education is surface-level knowledge where due diligence is digging deeper into the specific company and/or person(s) offering the investment. Don’t be scared to ask the hard questions. If they will not answer or are unable to provide the information, run, don’t walk away, and find a company or person who is. 


Consider Liquidity:

Alternative investments often have longer investment horizons and may lack liquidity compared to traditional assets like stocks and bonds. Consider whether you’re comfortable with tying up your capital for an extended period and evaluate the liquidity terms of the investment.


The words “tying up capital” are not meant to scare you; they are meant to help you realize that investing is not meant to be your rainy-day fund. Read the fine print of offering documents to determine the liquidity horizon and their options to extend with or without your consent.


Evaluate Fees and Expenses:

Alternative investments may come with higher fees and expenses compared to traditional investments. Understand the fees associated with the investment, including management fees, performance fees, and other charges. Factor these costs into your investment decision.


When you finance a car, you know you'll have a monthly payment, but how many people sit in the dealership waiting for the mysterious total car payment to come back from the ominous desk in the back and add up the monthly expense of the car payment, insurance, gas, and maintenance it will cost to keep the car mobile? We do not because we are so excited about the new car.


Investments are no different. It costs money to make investments, whether in rental property or in a fund.


Consult Professionals:

Consider seeking advice from a financial, tax, or legal expert who specializes in alternative assets. They can provide valuable insight and help you navigate the complexities of alternative investing.


I rarely make an investment without considering the tax implications. Would you rather make an investment that is tax deductible or tax-free than pay capital gains taxes or, worse, your personal tax bracket? You cannot play the naïve card with the IRS.


Review Regulatory Compliance:

Ensure that the alternative investment complies with IRA regulations governing self-directed IRAs as an example. Certain types of investments, such as collectibles, may have specific restrictions or tax implications.


Diversify:

Avoid putting all your eggs in one basket by diversifying your self-directed IRA portfolio across different asset classes and investment strategies. Diversification can help mitigate risk and enhance long-term returns.


Just because my knowledge base in a particular asset class is greater than others does not mean I should only invest in real estate. What if real estate values took a nosedive? It is all too common for people to get themselves in this type of situation. Don’t be that person.


Monitor and Rebalance:

Regularly monitor the performance of your alternative investments and rebalance your portfolio as needed to maintain your desired asset allocation and risk profile.


How often do you check your bank balance? How often do you review your retirement plan? Need I say more? You have no one to blame but yourself. You have to put in the effort to get the results.


By following these steps and conducting thorough research, you can make informed decisions when selecting alternative investments for your self-directed IRA. Remember that alternative investments carry unique risks and may not be suitable for all investors, so proceed with caution and seek professional advice when necessary.

 

 

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