Don't Bank on Retirement Accounts Organized By Others

In the world of business and finance, there is one simple rule everyone should be aware of:  control = decision-making and money.  

The person in charge not only controls all decisions but also the flow of money. When it comes to planning for retirement, most Americans are all too willing to give up control without knowing that when they entrust their money to others, they are not only giving up control of where their money is invested but also a substantial amount of future gains.

The Reality of IRAs and 401(k)s

When you contribute to a corporate 401(k), you’re entrusting your retirement future to someone else, and it might not be in your best interest. That’s because not only do the mutual funds that comprise your 401(k) underperform, but you also give up return on investment in the form of fees.

In the investment world, it is widely acknowledged that actively managed investment funds often underperform the market, as measured by an index like the S&P 500.

Take this in:  Ivy League-trained investment professionals, who devote their careers to beating the market and have all types of technology, tools, and algorithms at their disposal, frequently fail to do so.

This begs the question:

Why exactly are investors entrusting their hard-earned money to actively managed funds through their 401(k)s when they could just put their money in an index fund and do better?

Probably because it’s what everyone tells them to do.

Why Actively Managed Funds Underperform

According to an analysis of the S&P SPIVA report, a staggering 88.4% of domestic actively managed equity funds have underperformed their respective benchmarks over the past 15 years. The problem with actively managed funds, like mutual funds, is the futility of market timing. Like millions of individual investors who take on the risk of timing the markets, actively managed fund managers do the same thing and fail in equal measure.

Timing the markets can be an intoxicating strategy like gambling, driven by the ups and downs of the stock market. However, buying and selling based on market predictions is a strategy that typically fails. If timing the market were a reliable strategy, professional investors would consistently outperform, which we have found to not be true.

Besides underperforming, investing through actively managed funds also entails costs and fees that cut into returns for investors.

Take Control with Self-Directed IRAs and 401(k)s

The problem with actively managed funds isn’t just with market timing. It’s the market itself and the volatility of stocks.

Sophisticated, ultra-wealthy individuals and institutional investors don’t allocate a high percentage of their portfolios to stocks for a reason. Not only can they generate better returns in their portfolios from alternative investments, but they can do so without market volatility.

Instead of stocks, sophisticated investors prefer alternatives, but they can’t invest in alternatives through traditional IRAs and 401(k)s that offer favorable tax benefits. So how do savvy investors take advantage of the favorable tax rules surrounding IRAs and 401(k)s but be able to take advantage of alternative investments?

Enter the Self-Directed IRA and Solo 401(k)

Self-directed individual retirement accounts (SDIRAs) and solo 401(k)s allow investors to take advantage of tax benefits but take control of their portfolios by allowing them to dictate where to invest, including in alternatives such as real estate and private equity (investments in private companies).

The Appeal of Alternative Investments

Self-directed IRAs and solo 401(k)s offer investors control over a wider array of investment choices while avoiding management fees.

The Roth Option

Investors may consider a Roth option for their self-directed IRA or 401(k), where contributions are made with after-tax dollars and withdrawals in retirement are tax-free, freeing the investor of any worries about tax liabilities in the future.

Self-directed IRAs and solo 401(k)s are not for everyone. They’re meant for the bold and those who want to take control of their retirement destinies. These accounts offer the savvy investor the opportunity to take advantage of significant tax benefits while maintaining control of their portfolios.

When it comes to your retirement, why give up control and money? Why not consider self-directed IRAs and solo 401(k)s?