By J.P. Dahdah, CEO & Founder
There’s a nearly endless list of investment options on the market.
While Vantage clients enjoy the investment control and freedom their alternative IRA provides, they are still responsible for choosing the right mix of investment strategies to help them achieve their retirement income goals.
Savvy investors know that selecting the right asset strategies means first establishing a clear risk tolerance, time horizon, and investment appetite. As you get older and closer to retirement years, it is financially sound to reallocate most of your retirement savings into lower-risk assets that yield enough income to support your desired lifestyle through the golden years.
Investors looking to boost their retirement portfolio with high-yield, low-risk income-producing investments should consider private market options. These include convertible notes, trust deeds, private credit funds, promissory notes, joint venture agreements, and hard money loans.
In this month’s article, let’s delve into three popular alternative fixed-income strategies and entity types commonly used by aging Self-Directed IRA investors.
1. CONVERTIBLE NOTES
What Are Convertible Notes?
Convertible notes are debt instruments that can be converted into equity, typically shares of an issuing private company, at a later date. They offer a hybrid investment approach, providing the fixed-income characteristics of a traditional bond with the upside potential of equity conversion.
Why Use Convertible Notes?
Convertible notes are favored among Self-Directed IRA investors for several reasons:
- Potential for High Returns: If the issuing company grows significantly, converting the notes into equity can result in substantial capital gains.
- Interest Income: Until conversion, convertible notes typically pay a fixed interest rate by the issuing company, providing a steady income stream.
- Reduced Risk: As a debt instrument, convertible notes are less risky than direct equity investments because they have priority over common private stock in case of liquidation.
2. TRUST DEEDS
What Are Trust Deeds?
Trust deeds, also known as deed of trust investments, involve lending money to a borrower for real estate purchases. The investment is secured by placing a lien on the property, making it a relatively safe fixed-income option.
Why Use Trust Deeds?
Trust deeds are popular for the following benefits:
- Collateralization: The loan is secured by real estate, providing a tangible asset backing the investment.
- Passive Income: Investors receive regular interest payments, offering a predictable fixed income stream.
- Capital Preservation: With lower default rates and the ability to foreclose on the property if the borrower defaults, trust deeds can help preserve capital.
- Investment Control: The lender of a trust deed establishes all the conditions required of the borrower, giving a Self-Directed IRA investor complete control to define the terms for meeting their investment criteria.
3. PRIVATE CREDIT FUNDS
What Are Private Credit Funds?
Private credit funds pool investor capital to provide loans to businesses or individuals. Professional investment firms manage these funds and target higher yields than traditional fixed-income securities.
Why Use Private Credit Funds?
Private credit funds are attractive for Self-Directed IRA investors for several reasons:
- Higher Yields: These funds often provide higher interest rates compared to traditional publicly traded debt offerings such as bonds, treasuries, or CDs.
- Diversification: By investing in a pool of loans, a Self-Directed IRA investor can spread their risk across multiple borrowers and industries.
- Professional Management: Experienced fund managers handle the due diligence, loan origination, and collection processes, offering a hands-off investment approach.
Financial security and flexibility in retirement is an achievable goal. By leveraging alternative fixed-income strategies and investment types, you can secure the money you need to live comfortably while also taking full control of your investment decisions.
I hope learning about these popular types of alternative assets will help you identify the right strategies to reduce your nest egg’s exposure to stock market volatility and increase your confidence.
Happy investing!