Earlier this week, after Greece rejected the proposed financial relief plans from its creditors, U.S. stocks dropped following sharp declines in Asia and Europe. The market reaction is a prime example of how adverse global turmoil can rattle investors' confidence - and more importantly, underscores the imperative need to diversify investments and mitigate today's inherent risk.
While the Greek debt crisis is only one example, it speaks directly to the risks facing long-term investors or those planning for retirement, and far too many have their portfolios on autopilot. In fact, only 10 percent of people with a Fidelity 401k plan made any changes to their portfolio in the 12-month period ending in September 2014.
During that time, the U.S. stock market continued its erratic behavior as investors cashed in on record high M&A deals and IPOs, yet saw significant losses due to economic slowdown in hard hit areas including Greece, parts of Europe and Russia. As history has shown us from Russia's 1998 Ruble crisis, the downfall of any major foreign economy will likely cause volatility in the U.S. markets.
Since then, the sluggish global economy and six-year bull market has prompted more attention to asset allocation, but investors still need to protect investment portfolios with a safe alternative that can produce a consistent rate of return.
Hard assets, specifically real estate, have come into the spotlight recently due to its limited correlation to equities and negative correlation to bonds. While many hard assets come with increased risk and volatility, real estate protects against market fluctuations and allows investors to hedge inflation. For example, when the stock market bounces up and down, real estate performance remains relatively unchanged, and it can continue to be a strong option throughout the uncertain times ahead.
Economists predict home price appreciation to remain at a level that enables more people to purchase real estate and accumulate wealth. In fact, indexes from the Federal Housing Finance Agency estimate the value of homes to increase five percent over the course of 2015 - and in addition to positive market dynamics, when purchased through a self-directed IRA, the returns from income-generating real estate are tax-deferred.
Income streams generated from real estate that accumulate inside the self-directed IRA - including rent payments - go straight into retirement savings, not increasing the investor's income from a tax bracket standpoint, but helping to generate additional portfolio returns through tax-deferred growth. Additionally, specialized real estate investment groups can offer comprehensive services to make both the initial and long-term investment in real estate simple and user-friendly for self-directed investors.
These firms work to find investors a safe and sustainable investment, complete with property management teams in place to ensure the property's value and condition stays up to standards. Often, they buy or build properties in bulk at a discount achieved through research, relationships and years of expertise in the field.
Investing in real estate through a self-directed IRA is also attractive because of the ability to leverage your retirement dollar through non-recourse financing. Non-recourse mortgages are the only way to leverage dollars in a self-directed retirement account due to the recourse being solely on the asset and not on the individual. It is the retirement account that purchases and holds the asset, and it's deeded in the name of the self-directed account.
Experts have found that this type of investing is becoming popular among individuals with IRA accounts, as it offers a chance to diversify retirement portfolios through hard assets, helps mitigate risk, and offers an opportunity to produce income at a higher rate of return.
At a time when individual investors are so greatly impacted by adverse global economic issues, retirement portfolios must be diversified and sound. Volatility will continue as euro zone leaders focus in on the debt crisis in Greece, and investors should look to hard assets for protection.
For more information about self-directed IRAs and real estate investments, visit www.growthequitygroup.com.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.