From the mid-to-late 2000s, a toxic slurry of factors sent the American economy into a tailspin. In a matter of months, the S&P 500 dropped from $1,548 to $733, the Dow Jones Industrial Average fell from $13,917 to $7,040, and the NASDAQ plunged from $2,863 to $1,367 (per www.tradingview.com). Retirement accounts invested in those indices—or the stock market in general—endured the bumpy ride through what we now remember as the Great Recession.
Retirement is a marathon and not a sprint, but an unfortunately timed downward sprint in the stock market can jeopardize one’s financial well-being (especially regarding retirement). Anyone hoping to retire in the years leading up to the Great Recession may find little solace in the recovery that eventually followed. We now have the opportunity to learn from that event.
The flexibility and diversification afforded by self-directed retirement can help mitigate the effects of dramatic economic downturns. Without the ability to manipulate holdings in an employer-sponsored 401(k) or another such managed plan, your hard-earned retirement assets could endure the totality of a stock market crash. With self-directed retirement, you decide whether or not a portfolio adjustment could help you deal with a potentially lengthy recession. If you would rather not try to “time the market” by jumping between investments, a diversified portfolio can help soften the sting by keeping your proverbial eggs situated in multiple baskets.
That’s not to say that alternative assets were not susceptible to the Great Recession. Private lenders received a valuable reminder that qualifying borrowers and initiating sensible transactions can help prevent defaults. If your potential client cannot instill a degree of confidence that your self-directed investment will bear fruit, you may consider looking for other borrowers.
Real estate investors may have also witnessed the potential consequences of biting off more than one can chew when reviewing opportunities. The beauty of purchasing property with your self-directed IRA lies in your relatively uninhibited ability to adopt a familiar investment model, including making down payments and financing the rest. In a similar fashion, your IRA can issue earnest money for an investment property while utilizing non-recourse financing to complete the purchase. A real estate investment may not suit your circumstances simply because debt is available, so a proper evaluation of whether to purchase with or without debt is a valuable exercise.
While New Direction Trust Company does not advise or endorse any particular course of action, we encourage account holders to perform due diligence until the investment meets their standards of viability and legitimacy. A comprehensive understanding of your chosen markets and their corresponding assets can go a long way toward building a successful investment strategy.