By J.P. Dahdah, Founder & CEO of Vantage
With another year behind us, it is important to take time to review your IRA’s investments and evaluate if any adjustments should be considered to ensure that your holdings can produce your desired results. As the public markets continue to experience increased volatility and a forecast of less than favorable conditions for the year ahead, investors with the foresight to redirect their nest egg into larger allocations of privately held alternative assets should help their chances of lowering their down side risk and inject more stability into their retirement portfolios.
But which alternative investment strategies should be considered for your shopping cart in 2019? Well, in my humble opinion, alternative fixed income strategies is where the smart money will be placing their bets. Said another way, private lending opportunities, in which your IRA is the instrument extending credit to borrowers willing to pay an interest rate premium for the capital they need. This can be accomplished by identifying a private fund company that specializes in credit-based strategies or by doing it directly on your own. Before going further, however, I want to make it perfectly clear that in no way should my opinion, this article or my personal market outlook be construed as providing financial advice of any kind and for any reason. I am simply openly sharing my own insight as a fellow alternative investor with the hope that it may provide value in helping you make your own informed decisions with your money.
The way I see it, we are nearing a market cycle shift. The Fed continues to signal more interest rate hikes for 2019, which in turn will negatively affect bond yields. This will have an adverse effect into any retirement portfolio holding traditional fixed income allocations (i.e. Government Bonds, Corporate Bonds, etc.). Most Americans don’t typically invest into individual bonds, but rather do it through bond mutual funds. How much of your overall retirement portfolio should be placed into the “fixed income” bucket is driven by your age, risk-tolerance and time horizon. If you are a baby boomer, for example, chances are that you have heard that a prudent fixed income allocation for you is anywhere between 45-60% of your overall retirement savings. So, assuming that your IRA is holding bond mutual funds as your fixed income product of choice, you should be anticipating a compression of yield from that portion of your portfolio. I expect traditional bond yields to be below 3% and remain there for at least the next 3 years, which will not keep up with inflation. For those of you that are already living off the income from your IRA, even more attention should be placed on this. Can you afford to maintain your lifestyle if your IRA’s fixed investment returns drop to those levels? Probably not. This is why I believe an alternative fixed income asset selection should be considered as a hedge and proactive move against the upcoming 2019 market conditions. Private notes are increasingly becoming the alternative investment of choice for our self-directed IRA account holders. Private lenders are identifying credit worthy borrowers willing to pay interest rates between 8-12% annually, which is well above what the stock market fixed income options are producing. Keep in mind that the safety of the debt instrument you invest into correlates directly with the quality of the security used to protect it in the event of a default by the borrower. The most common private lending strategy used within Self-Directed IRAs is real estate-based secured notes, also known as deeds of trust. Private notes can be structured in many different ways, for a virtually unlimited array of objectives and with a multitude of security options so be sure you do your homework before entering into any private note investment purchase. I also encourage you to seek the counsel of an experienced attorney that can help protect your IRA’s interest throughout the promissory note agreement and documentation being utilized to materialize the terms of the loan investment.
No one has a crystal ball, including myself. I am not trying to predict exactly when the market cycle will officially turn for the worse. I just want to protect my money as much as possible and I assume you do to. As the old saying goes, “it doesn’t matter how much money you make, it only matters how much money you keep.” Many investors have made a good amount of money in this last bull market, so it’s time to be prudent and not greedy. Looking for opportunities where your IRA can play being the bank could just be the winning strategy heading into turbulent times.
Happy alternative investing!!