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A Smarter Way for Your IRA
Are LLC IRA’s the way to go for your personal retirement account? Is it time to change the way retirement assets are managed? Should your IRA be held in a Limited Liability Company, rather than by an impersonal financial firm that manages thousands or even millions of other accounts?
Why would anyone consider such an option? Because—news flash--the world has changed a great deal recently, and is continually changing. Shouldn’t your retirement investment vehicle provide you the ability to adjust your retirement portfolio to keep up with those changes?
More fundamentally, the money in your IRA is your money; shouldn’t you be able to invest it as you see fit? Shouldn’t each IRA investor have the opportunity to diversify into a multitude of asset classes? Shouldn’t investors have real and alternative investment options, rather than having to follow the well-trodden path of the heard and endure all the bumps and drops that the stock market throws at their portfolio in the typical mutual fund-based IRA portfolio?
The New Realities
A few years ago, this question wouldn’t even come up. Small investors with an IRA would simply make their annual contributions and maybe re-adjust their portfolio with the help of their financial advisor—if they had one—or their portfolio would adjust automatically at fixed intervals of time. With the stock market returning more or less steady gains year after year, stability and predictability were less of an issue. The system worked out okay for most investors. Sure, the market had its ups and downs, but the ups out-performed the downs, and generally, buy and hold investors ended up in the black over the long term.
But, in the past decade or so, as larger events began to occur in the financial world and the world at large with greater frequency. Thus, their impact on the stock market was also greater and more frequent. A typical starting point for these large events would be the 911 terror attacks, although one could reasonably argue that the Asian Currency Crisis of 1998 was a large event, too. The Dot Com boom and bust was also a big event. The war in Iraq, the housing boom and bust, and then the global financial crisis, all quickly followed. Then, the stimulus response and long-term high unemployment both left the stock market fundamentally changed from what it was only ten years earlier.
The larger point is that as the world became more integrated, and the ability of the United States to manage the world diminished, both the stability and the predictability of the market began to change. Worse, the financial fraud and corruption that pervades the financial world has eroded the validity of and integrity of the system in the eyes of many investors. The result of these events are that today, volatility has replaced stability and predictability; and both are now being helped along by new, highly leveraged and highly liquid instruments.
Think of the impact derivatives had, and will continue to have, on market stability and viability. Our largest, more powerful financial institutions “managed” their position risks in all kinds of markets with derivatives, which helped them hedge against loss by sharing the risk with each other with sophisticated and highly manipulated instruments that became worth more in terms of capital invested—and at risk--than the original risks themselves. Of course, this has led to mass failure and bailout in the recent past and threatens to do so again.
And in the trading realm, Exchange Traded Funds (ETFs) and computer trading programs have changed the nature of the market and investing altogether. Today, ultra-fast and highly leveraged computer-programmed trading has replaced the long-term investor as the main driver in stock prices. (The only exception, of course, is the Federal Reserve itself. The Fed’s stimulus programs, as noted here many times before, has resulted in an stock market with inflated share values dependent not so much upon earnings, but upon the Fed’s repeated infusion of cash into the markets. This too, has its limits and risks.)
But remember the small investor with his or her retirement savings in an IRA? What did all this change and volatility do to their accounts? It devalued them by up to 50% almost over night—more than once—and resulted in the small investor losing both asset value and confidence in the market. And where is the small investor today? In most cases, they’re out of the stock market. Market volume is historically light because the retail investor in this country has left the market. They don’t trust it…and frankly, have no reason to. Low market volume leads to even more volatility.
The long term buy and hold strategy of most IRA mutual funds is not a safe way to really build value, nor is it realistic in today’s world. But that poses a dilemma for the American investor: To utilize the tax advantages of an IRA, the choices are risk the money in the stock and bond markets, or let it sit in low interest money market accounts. And since 2008, we know that even those “safe” accounts, aren’t really safe at all.
Not a great set of options, are they? But there is a better way.
A Better Way of Investing
The LLC IRA changes all of that. It allows the investor to put his or her retirement assets in a whole universe of investments, not just stocks and bonds. Furthermore, it takes control out of the hands of the IRA mutual fund custodian and puts the control back where it belongs: with the investor. Worried about legal and compliance issues? The manager of the LLC can be a firm that specializes in that, which will charge you a small annual compliance management fee around 1% to take the burden and liability of compliance off your back.
For example, the investor might want to take advantage of low interest rates and property values and invest in a Duplex, that yields a monthly cash flow. The investor may want to invest that monthly cash flow in gold, silver, or both. Or perhaps the investor wants the opportunity to get in on the ground floor of a new business. He or she could invest some of the retirement assets in private placements offered through the LLC IRA. Unlike conventional IRAs the options and possibilities for the investor in an LLC IRA are wide open.
Is there any investment that carries no risk of loss or some level of volatility? Not in the world there isn’t. But, is the LLC IRA the answer to investors’ needs for control and true diversification for their retirement assets? It is one answer; that much is certain.
And those are…The Gorrie Details.