On June 15, 2022, the Federal Reserve raised interest rates in the hopes of stemming the tide of inflation. Everything from food to gas has been going up as inflation hit 8.6% in May. The rate increase is supposed to help with the rising costs and help “cool” the economy. In case you have noticed, the week ending June 17 was the worst the stock market has seen in two years. As the Fed raised rates, the markets fell, and stocks entered a bear market.
- Earlier this month, the stock markets entered bear market territory
- It is important to diversify your holdings, especially during times of economic tumult
- A Self-Directed IRA allows one to invest in alternative assets, like real estate and precious metals
A bear market is defined by a “broad market index falling by 20% or more from a recent high.” As of market close Monday, June 13, the S&P 500 index officially hit bear market territory. After a nice rebound on Monday the 20th, the market is down more than 16%, about 5% less than it was late last week. The S&P 500 entered bear market territory on June 13 and is down over 21% as of this writing.
As of June 15, 20022, cryptocurrencies continued to drop, with Bitcoin hovering around the $20,000 mark as investors dumped their most speculative holdings. The consumer price index has increased 8.6% over the last 12 months, while the S&P 500 has fallen 11.9% over the same period.
Self-Directed IRA Demand on the Rise
A Self-Directed IRA is the most popular vehicle for retirement account holders to invest in non-traditional assets, such as real estate, or an emerging asset category, such as cryptos. It is a type of retirement plan that offers the IRA owners the ability to invest in IRS-approved alternative assets.
Internal Revenue Code does not describe what a self-directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits “disqualified persons” from engaging in certain type of transactions, such as the purchase of life insurance, collectibles, and any transaction that directly or indirectly personally benefits a disqualified person. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.
Read More: Real Estate the Best Hedge Against Inflation?
There are many reasons why IRA owners will likely explore alternative assets in light of a falling stock market and rising inflation in 2022. Just like equity investments, alternative asset investments in a Self-Directed IRA benefit from the power of tax deferral or tax-free investing in the case of a Roth IRA.
Approximately 90-95% of the 60 million IRA are invested in traditional assets, such as equities. Investing ones IRA funds in alternative assets offers the IRA investor the ability to diversify their retirement assets from being exclusively invested in the equity markets.
2022 has turned into a very rough year for the equity markets. Most equity markets are down double figures. Gaining the ability to diversify your IRA assets by investing in alternative assets and not being invested exclusively in equity markets will help better protect your IRA assets.
Sleep Well at Night
Like 2008, in 2022, IRA owners have become disturbed with the volatility and unpredictability of Wall Street. The performance of the stock markets in 2022 have left many IRA owners nervous and looking for a way to limit their IRA’s exposure to volatility.
For many IRA owners, alternative assets feels safer because they are easier to understand. As home ownership across this country has grown, more and more Americans view real estate as a safe and trusted asset class. Real estate investing still involves some risk. However, many IRA investors feel safer investing in real estate precious metals and businesses, which they can better understand.
See & Touch What You Own
Many alternative assets, such as real estate and precious metals, are tangible hard assets that an IRA owner can see and touch. Real estate is a tangible asset that one can see and touch. The tangible aspect of real estate makes it the most popular alternative asset for IRA investors. Having the ability to see and touch an asset in your IRA offers many IRA investors with a sense of calm especially during the 2022 stock market downturn.
Related: Beginners Guide to the Self-Directed IRA
Just like 2008, 2022 will be another example of the importance of diversifying one’s retirement portfolio. IRA investors that have had all their assets in equities are experiencing steep losses. However, IRA investors that have elected to pursue a balanced IRA portfolio, including real estate and other alternative assets via a Self-Directed IRA have likely in a far better financial position.