Asset diversification in reducing the risk of your portfolio

The Top 10 alternative investments to consider for your IRA

Provided by iDIRECT

Until recently, many average investors limited themselves to investing in stocks and bonds within their retirement plans. Only high-net worth clients were taking advantage of investing in alternative assets within their retirement plans, specifically Individual Retirement Accounts (IRAs). The most famous example of alternative assets used to fund an IRA to exceptional effect is the 2012 Presidential candidate, Mitt Romney. He invested in private shares and the investments of his company, Bain Capital. As of 2010, the value of his IRA was between $20 million and $100 million.

Now, the average investor, seeking diversification in their portfolios, are turning to alternative assets to stocks and bonds. The following is a list of the 10 investment strategies bringing wealth to people using self-directed IRAs to invest in alternative assets.

1. Residential Properties
2. Commercial Rentals
3. Vacation Rentals
4. Raw Land Development
5. Private Lending
6. Precious Metals
7. Tax Liens/Deeds
8. Start-Up Businesses
9. Private Placements
10. Oil and Gas Royalties

Other popular investments include crowd funding, private equity investments, private mortgages, or promissory notes, as the options are really limitless. The IRS code doesn't say what you can invest in, but instead identifies which investments are not permitted. These prohibited investments include life insurance contracts and collectibles (such as works of art, rugs, jewelry, etc) according to Internal Revenue Code Section 401 (IRC § 408(a) (3)).

This article discusses in more detail, five popular non-traditional assets that the IRS permits in an IRA.

Real Estate:

The most popular non-traditional asset is real estate. Investors can invest in rentals properties where the rent grows tax free, or flip houses, purchase foreclosures, or purchase foreign property.

Precious Metals:

Since the 2008 Great Recession, precious metals, particularly gold, are becoming an alternative to conventional assets, such as stacks and bonds, to protect the value of their investments against a weakening dollar, geopolitical uncertainty, inflation and deflation, and as part of a diversified portfolio. The IRS has limited the type of precious metals allowed in an IRA. For example, only gold that has a .995% purity are allowed in an IRA.

Promissory Notes:

A promissory note is a written agreement between you and another party to loan a specific sum to be paid back at a specific date in the future. There are two types of promissory note: secured and unsecured. A secured note is note backed by collateral, and an unsecured note is not backed by collateral and the interest rates on these loans tend to be higher than secured loans.

Tax Liens:

Yes, tax liens are allowable assets within an IRA. A tax lien is a legal claim by a government entity against a non-compliant taxpayer's assets. When you purchase a tax lien, you are purchasing the right to collect the outstanding taxes. Once the tax lien has been purchased, you only have to wait until the delinquent taxes are paid. If these taxes go unpaid for three years, you will have the right to take possession of the property through foreclosure.

Venture Capital:

Venture capital is money provided by an investor(s) to start-up firms and small businesses with perceived long-term growth potential.  Most venture capitalists invest for long-term capital growth, not for income. Therefore, a Roth IRA is suitable for this type of asset because capital gains are tax-free. You must be aware that the IRS prohibits "self-dealings," that is, using their IRA assets to benefit them or their family before you retire.

How to invest in alternative investments within an IRA

Not all IRA providers have the administration to deal with alternative assets. Only specialist custodians have the expertise to establish self-directed IRAs. Alternatively, if you wish direct control of your assets, you can use the IRA LLC model offered by an IRA facilitator who can generally set up an IRA LLC cheaper than a lawyer or accountant who may be familiar with the structure.

Since the stock market fluctuations of 2008- 2010, many investors have lost confidence in the stock market and wish to diversify part of their portfolios away from stocks. Not only do they want asset diversification within their portfolios, they also want to invest in assets they know. Investing alternative assets within an IRA is not a new investment strategy, as Mitt Romney has proved. In fact, the legal basis of self-direct investing passed in 1974. It has only been recently, however, that this investment strategy has become mainstream.  

For more information on self-directed IRA LLCs, visit www.idirectlaw.com

Ukraine Turmoil Boosting Gold Prices, But Should We Buy?

Gold prices are a funny thing, the more turmoil and uncertainty there is in the world, the higher the value goes. Gold is considered a 'safe haven' investment. For thousands of years, and from civilization to civilization, gold has retained monetary value. So if you're worried about the zombie apocalypse, or Russia taking over the world - gold should be your investment of choice (or guns I suppose). That being said, as a US based investor, should I be running to buy gold because of something going on thousands of miles away? Can I make some money investing in gold right now?

At the end of the day, we're investors, right? If there is an opportunity to make a good return, then it's at least worth looking at.

So, is there truly an opportunity to make money investing in Gold today? I'm not convinced, but let's do some quick internet searches and see what some of the 'Gold Investment Experts' have to say.

When you start doing research about why you should buy gold, interestingly enough, most of the commentary happens to be from companies that sell gold - that, and the doomsday publications that try to get you to pay for their investment newsletters. Typically that's not a good sign, but I carried on, and this is what I found:

Forbes - 3 Reasons To Buy Gold Now
Money Morning - 1,600 Reasons To Buy Gold Now (Just in case 3 wasn't enough)
WSJ - The Case For Gold

Okay, now for the other side of the argument:

DoughRoller - 6 Reasons Gold Is A Terrible Investment
MarketWatch - Why Buffett Thinks Investing In Gold Is Stupid
USA Today - Gold: The Investment Dog That's Not Hunting

Personally I'm still not convinced gold is the investment for me. The fact that it doesn't generate any income, has limited commercial use beyond jewelry, and is really expensive, are all pretty big turn offs. At the same time, I feel like I should have at least a small portion of my portfolio invested in precious metals and other commodities. After looking at some other precious metals options, I did come across one that seemed pretty intriguing.

If I'm going to start buying precious metals, that precious metal is going to be silver. Silver might not get as big a boost in value as gold when the world goes crazy, but it does get some. The kicker for me, though, is that silver has so many more practical applications. Gold is basically used for jewelry, and that's it. Silver is still used in jewelry, but it has a ton of other applications as well.

Silver is used in all sorts of manufacturing, including computers, smartphones and televisions, among many others. In addition to being one of the best conductors of electricity, silver also has antibiotic properties that make it vital to the medical industry. The more I learn about silver, the more interested I become. Gold might not be for me, but if I decide to diversify some of my portfolio into precious metals, it's good to know there is another option out there.

This guest post was contributed by Sam Jenkins.

This guest article does not represent the views or opinions of NuWire Investor, or any of its subsidiaries.

What's Going To Happen To Freddie And Fannie? What Does It Mean For Mortgage Rates?

Yesterday RealtyTrac published a good article talking about the debate currently going on in Washington D.C. about Freddie Mac and Fannie Mae. There are several moving parts in this whole ordeal that investors should be aware of. Rather than trying to regurgitate those for you here, we suggest you read the article from RealtyTrac.

It's mind boggling how much money the government is pulling in from Frannie and Freddie now. However, at the same time it feels like we've been down this road before. Mortgage rates can't stay this low forever, can they? Everything is rosy now, but what happens if this new real estate bubble that seems to be forming pops? As soon as mortgage rates start to go back to a normal range, what's going to happen to the housing market?

Housing values are being inflated thanks to historically low interest rates. When that 3.75% 30 year fix mortgage goes to 5%, all the sudden instead of being able to afford a $300,000 house, that same homebuyer will only be able to afford a $260,000 home. The housing market simply won't be able sustain current values once this rate increase happens. Then, just like we saw before, the snow ball effect will come into play and things will get exponentially worse.

If the government shuts down Freddie and Fannie, you can be that rates are going to increase a lot faster than they would otherwise. At the same time, though, this current model is not sustainable either, at some point it is going to crash, and the government is going to be on the hook. I suppose at least this time around the government gets to participate in the upside. Too bad they don't do a a better job of managing the profits.

What Is The Correlation Between Oil Prices And Inflation?

Many investors believe that the movement in oil prices can give them advance signals into how inflation will change in the future. Is there any truth to this, though? Well, Mehmet Pasaogullari and Patricia Waiwood from the Federal Reserve of Cleveland recently ran the numbers to help answer that question once and for all. Here is the summary of their findings, which you can read more about here:

Some analysts pay particular attention to oil prices, thinking they might give an advance signal of changes in inflation. However, using a variety of statistical tests, we find that adding oil prices does little to improve forecasts of CPI inflation. Our results suggest that higher oil prices today do not necessarily signal higher CPI inflation next year, although they do help to explain short-term movements in the CPI.

Being able to predict changes in inflation could make investors a lot of money, but apparently using oil prices to foretell those changes isn't the golden goose some people thought.

Fed Prints More Money

A quick look at the Federal Reserve’s balance sheet in terms of assets has led some economist’s to wonder what the Fed is planning to do, while others say there is no plan at all. The lion’s share of assets are tied up in U.S. Treasury securities and mortgage-backed securities, which doesn’t seem like a problem when inflation rates are kept in check as they are now, but when considering the financial turmoil experienced in the last seven years there are some who believe that more quantitative easing may lead to rude awaking in this fragile financial ecosystem. For more on this continue reading the following article from Tim Iacono. 

After catching up a bit on all the commentary related to the Federal Reserve’s ongoing money printing effort such as this item from yesterday and today’s offering from Jim Jubak at MSN Money where it was concluded that “The Fed has no endgame“,  refreshing the simplified graphic of the central bank’s balance sheet below seemed like a good idea, particularly since they are rapidly closing in on the $4 trillion mark.



Of course, there is a growing consensus that this is all benign (or at least irrelevant as long as stock prices are rising) and that argument is lent some credence by the low rates of inflation for consumer prices reported in the West (inflation in developing nations is an entirely different matter). Somehow, it seems the quadrupling of the Fed’s balance sheet (and then some) will prove to be anything but benign.

This article was republished with permission from Tim Iacono.

Breaking Down Transactional Funding For Real Estate Investors

Investing in real estate offers a lot of opportunity for financial growth. Flipping properties, the process of buying at low cost, quickly renovating and selling at much higher cost, is an excellent way to make fast profits. However, you may not always have funds readily available to make purchases, and you don’t want to be in constant loan debt. That’s when transactional funding can help.

What is transactional funding?

Transactional funding refers to a transaction-based short term loan that you use to purchase property that you will turn around and sell. The proceeds of that sale are then used to pay back the loan, allowing you to avoid a long-term debt. The loan is transaction-based because the purchase by you, called the A-B side of the transaction, as well as your subsequent sale to another buyer, the B-C side of the transaction, must already be arranged in order to obtain this type of loan.

What are the advantages?

You can enjoy several advantages from a transactional funding loan versus a regular hard money loan, including:

• No credit checks
• No proof of income required
• No money down
• Loan covers closing costs
• Lower loan costs

Credit checks and income verification are not required because the loan is based solely on having a buyer ready to purchase the property from you as soon as you have closed on it. Having the B-C end of the transaction lined up for as soon as you complete the A-B part of the transaction significantly reduces the risk to lenders, allowing for more favorable loan terms than other types of real estate loans could offer. That, plus the fact that the loan is short term, allows transactional funding loans to be less expensive than regular loans. With no money down required, you can capitalize on lucrative properties for which you may not have the funds to purchase up front.

What types of transactions can be funded?

While the loan cannot be used for mobile homes or non-real estate transactions such as vehicle purchases, you can take advantage of the loan for most real estate properties. Qualifying properties include commercial real estate, for sale by owner homes, bank owned/foreclosed homes and apartment buildings. As a savvy investor, you can make an excellent profit purchasing properties at a discount, such as bank foreclosed homes, flipping and selling them at a higher profit margin.

This article was originally published on realestatemoney.com.

Retirement Options Dwindle

The recession, the housing crisis, increasing taxes and a turbulent employment landscape has made it nearly impossible for many people nearing retirement to do so comfortably, according to a recent study. The report from the Employee Benefit Research Institute shows that employer-provided retirement plans and other savings vehicles will not be adequate to fund retirement even for those who have saved, and that the news is even worse in the black community. Moreover, it appears government is looking to cut retirement plan benefits further, which means the problem is only going to get worse. For more on this continue reading the following article from Economist’s View. 

The "news isn’t good" about the shift from defined-benefit to defined-contribution pension plans:

Declining Wealth Brings a Rising Retirement Risk, by Bruce Bartlett, Commentary, NY Times: ...[In] defined-benefit ... pension plans..., workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations. Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. ...

Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn’t good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.

Not surprisingly, retirement saving has taken a back seat to more pressing concerns – coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. ...

This problem is much more severe for black Americans. ... The wealth gap isn’t only racial, it’s generational...

What’s really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse.

Republicans in Congress have pressed for years to convert Social Security, a classic defined-benefit pension, into a defined contribution plan, and also to convert Medicare into a voucher program. These changes would shift even more of the financial risk in retirement onto families that have yet to adapt to fundamental changes in employer pensions and the economy over the last 30 years. The future doesn’t look pretty.

Members of Congress appear to be eager to cut retirement benefits even further to show they can make the hard choices (and the president seems to be on board). They should raise the payroll cap instead, but the "hard choice" that would hit the people who can afford it isn't under consideration. It's not hard to imagine why.
 

This blog post was republished with permission from The Economist's View.

US Housing Starts Improve

The latest Commerce Department reports shows that U.S. housing starts are on the upswing, although experts note that basing predictions on data so early in the year may lead to drawing erroneous conclusions. Even so, single-family home construction starts have climbed more than 27% when compared to the same time last year, which competes with levels not seen since 2008. Permit issuance is also up and is tracking closely to starts, although both numbers still remain at one-third the amount seen prior to the start of the U.S. recession in 2006. For more on this continue reading the following article from Iacono Research. 

The Commerce Department reported(.pdf) that housing starts rose 0.8 percent in February to an annual rate of 917,000 units and permits for new construction, a key leading indicator for the home building industry, jumped 4.6 percent to a rate of 946,000, the highest level since June 2008.
From year ago levels, housing starts are up 27.7 percent and permit issuance is 33.8 percent higher.



Starts for single-family homes rose 0.5 percent to a rate of 618,000 units, also the highest level since 2008, accounting for about two-thirds of the overall total, however, home building remains about one-third below the pre-housing bubble pace of about 1.5 million units per year.

It is once again worth pointing out that not too much should be inferred from housing data at this time of the year due to dramatically lower activity in most of the country during the winter months and the outsized impact of seasonal adjustments. Nonetheless, this offers more evidence of ongoing improvement in the housing market as builders ramp up their plans for new construction in the months ahead.

This blog post was republished with permission from Tim Iacono. 

Experts Say Gold Down, Not Out

Precious metals prices have been slowly trailing off for months, which is a sharp turn for what was once a bull market for gold and silver. Investment firms are downgrading their forecasts and the Federal Reserve is printing money left and right, and the combined effect has been hard on investor sentiment. One expert believes the metals can rally, however, especially if a trend toward inflation becomes evident. Actual inflation is admittedly unlikely in the near term, but if the money printing appears that it may cause inflation it could be followed by renewed interest in gold and silver. For more on this continue reading the following article from Iacano Research. 

It’s no secret that precious metals have disappointed many investors in recent months after prices failed to move higher following the announcement of more money printing by the Federal Reserve late last year.

So far in 2013, gold and silver have moved steadily lower based in large part on the idea that despite the central bank creating $85 billion per month in new money, inflation is not a near-term threat (and maybe not even a long-term concern).

In recent weeks, investment banks have been falling over themselves in an attempt to downgrade their precious metals price forecasts sooner and farther than their competitors and this has helped to sour sentiment. Also, record outflows from gold ETFs such as the SPDR Gold Shares (GLD) have added to the selling pressure.

Based on what you might read in the mainstream financial media these days, you may as well stick a fork in the secular gold bull market because it’s all but done (and maybe silver too), but there’s a very good argument to be made for why that is not so.

In short, now that the latest round of Fed money printing is causing the monetary base to grow, higher inflation is likely to follow. Then, perhaps suddenly, investors and traders will flock back to precious metals.

Allow me to explain.

[To continue reading this article, please visit Seeking Alpha.]

Economist Skewers Fed’s Expert Outlook

Tim Iacono takes note of Neil Irwin’s recent critique in the Washington Post of U.S. government economists and their prognostications for the last few years, arguing that they basically don’t know what they’re talking about and may even be guessing. He points to their GDP growth predictions for 2011 and 2012 and how they were both similarly inflated. He then points to the outlook for 2013 and suggests the rhetoric could have been cut and pasted from previous years, leaving some to expect the worst when it comes to this year’s economic performance. For more on this continue reading the following article from Iacono Research.

A look at the abysmal track record in recent years in forecasting economic growth by the nation’s top government economists as related by Neil Irwin in this Washington Post story. Also see the related graphic that depicts how poor a job the economy has been doing in getting back to its “potential” growth.

They say that the essence of futility is to keep doing the same thing while expecting a different result. But is that what key government forecasters are doing in determining their outlook for the economy?

Throughout the halting economic recovery that began in 2009, the formal economic projections released by the Congressional Budget Office, White House Council of Economic Advisers, and Federal Reserve have displayed quite a consistent pattern: This year may be one of sluggish growth, they acknowledge. But stronger growth, of perhaps 3.5 percent, is just around the corner, and will arrive next year.

Consider, for example, the Fed’s projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012.

What’s amazing is that the Fed’s newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015.

Increasingly, it appears that this is one of those times when “it really is different” in that we’re not about to return to “trend growth” and for good reason – it was artificial, based on a reckless expansion of credit.

Then again, another reckless expansion of credit might just do the trick.

This blog post was republished with permission from Tim Iacono.