Should Retirement Savers Invest in Real Assets or Stick to Publicly Traded Stocks and Funds?


Advisors see advantages of real assets, as well as self-directed IRAs, but there’s no one-size-fits-all approach.

Diversification has long been a tentpole of retirement investing, and for very good reasons.

Owning varied asset classes reduces your exposure to industry-specific or company-specific risk, and allows you to participate in the upside of leading sectors.

Within a strategy of broad diversification, you have to make decisions about the actual investments.

Typically, retirement savers work with financial advisors to develop a portfolio of liquid stocks and bonds. But investors can put money into other investment vehicles, such as real assets, which may include owning precious metals, art or real estate outside a primary residence.

Advisors and retirement experts say there are some valid reasons to diversify outside of publicly traded liquid assets.

“Investors should diversify their portfolios in such a way that includes real assets,” says Andrew Latham, a certified financial planner and content director at SuperMoney, an online financial comparison platform.

“Unlike stocks and bonds, real assets typically have a positive correlation with inflation and interest rates, so it is smart to include real assets, such as real estate and commodities, in your portfolio,” he adds. “During the hyperinflation years of the 1970s, for example, commodities, such as gold, energy and raw materials, all outperformed bonds and stocks.”

Latham notes that purchasing art, wine, gold or a building introduces risk and management expenses that only sophisticated investors are prepared to handle.

“Practically anybody can invest in real assets by using specialized funds,” he says. “An easy way for investors to get exposure to real assets is by buying real estate investment trusts and funds that specialize in natural resources and infrastructure, such as Vanguard’s REIT Index Fund (ticker: VNQ) and FlexShares Real Assets Allocation Index Fund (ASET).”

Advantages of Self-Directed IRAs
Many investors don’t realize it, but a self-directed IRA allows account owners to hold hard assets, such as real estate or precious metals. A self-directed IRA is more than just an individual retirement account that you hold at a brokerage and manage yourself. Instead, it’s a very specific type of account that can hold alternative investments prohibited in a standard IRA.

“Holding real assets in a self-directed IRA can be advantageous, particularly if the investment produces high levels of income that is able to grow tax-deferred,” says Theodore Schneider, director and portfolio manager at Round Table Wealth Management in Westfield, New Jersey.

Investors must use caution, however. Schneider notes that even IRAs have additional regulatory constraints around real estate and other real assets. These constraints, he says, may inhibit the effectiveness of IRAs.

“For example, real estate property held in a self-directed IRA has certain drawbacks. The property must be for investment purposes and not for any personal use,” he says. “Additionally, owning real estate property in an IRA forgoes the potential beneficial tax deductions, as an IRA does not pay taxes. Finally, owning real estate in an IRA can create liquidity issues, as the IRA is responsible for making all necessary payments on the property.”

He adds that IRAs cannot hold items categorized as collectibles by the IRS, such as artwork.

Not Right for Every Client
While self-directed IRAs can be a good place to hold non-traditional assets, they clearly have disadvantages and aren’t for everyone.

Brian Greenberg, CEO of Insurist in Scottsdale, Arizona, says clients should diversify into tangible assets.

“At least 20% of their portfolio should be in property they don’t live in, fine art and other collectibles, and commodities such as gold, silver, platinum and palladium,” he says.

However, he’s not a fan of real assets held in self-directed IRAs.

“Self-directed IRAs, like gold or silver IRAs, entail custodian charges, storage fees, extra insurance and additional IRA fees not found with a traditional or Roth IRA,” Greenberg says.

He points out that commodities and collectibles can be stored securely in a residence with a home security system and in a waterproof and fireproof safe.

“A safe-deposit box at a bank will also provide quick access to real assets, unlike those held in a self-directed IRA,” he says.

Greenberg prefers holding actual assets over a real estate investment trust or a fund, but he makes recommendations based on each individual client’s needs.

“For example, I might recommend to a client concerned with their personal safety and security that they invest in a gold ETF rather than physically possessing gold,” he says. “However, for a client that feels secure keeping valuable art, wine or precious metals at home, I definitely recommend that they pursue this avenue for diversification and as a hedge against inflation.”

Funds Offer Diversification
Anessa Custovic, chief investment officer at Cardinal Retirement Planning in Chapel Hill, North Carolina, also says the choice between real assets and funds depends upon the client’s needs.

“If a client is able to lock money up for a few years and will not need access to it, then I might prefer some physical commercial real estate projects if it’s a good fit,” she says.

She adds that commercial and residential real estate don’t have the same correlations with the equity market as a publicly traded real estate investment trust, or REIT.

“Most REIT ETFs or mutual funds or individual REIT company stocks usually move with the market, so you are not really hedging your equity risk with this type of real estate exposure if that is your goal,” she says. “Depending on the location and project type, I find individual real estate projects are often good equity hedges.”

She adds, however, that it’s not appropriate for every retirement investor to hold illiquid real estate. In those cases, Custovic will recommend REIT ETFs or mutual funds. That decreases risk and offers more diversification since REIT funds hold various types of real estate exposure, rather than just a single company.

Custovic says this means “less risk for investors if a project goes south, as they have exposure to a ton of other types of investments within the funds.”


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