The concept of pooling money to increase investment opportunities and reduce risk is not new. Mutual funds, real estate investment trusts, and master limited partnerships have given Wall Street the power to collect smaller amounts of money from many investors with the goal of increasing returns while reducing volatility. Today, many successful IRA investors are looking to adopt similar strategies to broaden their investment horizons.
Historically, investors were driven toward investments like bank CDs, mutual funds, bonds or stocks. But not only can individuals invest individually or pool investments with others, they can also select from a broader range of assets. These “alternative” investments include any asset not publicly traded on a listed exchange, such as private equities, limited partnerships (LPs), real estate, limited liability companies (LLCs), mortgages/deeds of trust, etc.
Interest is Growing
Even companies like Dell Computer and Berkshire Hathaway were once private investments that went on to become mainstays in the
Alternative investments can also provide greater diversification and often produce returns with a low correlation between conventional shares and fixed interest assets. The level of correlation depends on the specific type of alternative investment considered and the make-up of an investor’s existing portfolio. If well-chosen, the addition of alternative assets may increase one’s level of total portfolio return with little or no extra risk. When a Roth IRA is used, money earned on the investment can grow tax-free.
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Pooling IRA Funds
Looking to duplicate the success of others, many savvy IRA investors are combining these two concepts–pooled money and alternative investments. Many are forming limited partnerships or limited liability companies to take advantage of the growing popularity of alternative investments. Others are simply looking at individual investment opportunities, like commercial real estate projects or pooling funds with a few associates.
Pros and Cons
Benefits of pooled investments include enhanced opportunities; exposure to investment expertise from investors and/or experts, and diversifying money across a broader range of investments, potentially reducing the overall impact of lower performing investments.
The downside includes lack of a secondary market for selling such illiquid investments, potential difficulty in determining fair market value, having to commit money for a minimum period and reduced regulatory oversight, since alternative investments are not publicly traded or subject to the same level of regulatory scrutiny.
As with any investment, the individual should do his or her own due diligence, including looking at the management’s experience (for investments in private stock or commercial construction), their past track records and familiarity with the investment.
When the investor has identified an opportunity, the process of investing with an IRA can be simplified by working with a knowledgeable self-directed IRA custodian. Instead of using his or her name on the investment, the investor will replace that information with the name of his or her IRA. A good self-directed IRA custodian will then maintain all necessary paperwork and provide reporting.
Conclusion
Many options for growth exist beyond the stock market. A pooled alternative investment strategy can produce attractive and substantial portfolio risk reduction benefits to many investors that are heavily weighted in more traditional listed equities and fixed income instruments.
