Investing Using a Self-Directed Brokerage Account | Portfolio Management

Instead of leaving your investments on autopilot, you can take a standalone investing approach.

While self-directed brokerage accounts can be used for a range of investing backgrounds, they offer value to many investors as retirement accounts. They can give investors access to a wider range of retirement investment options and better control how and where they invest.

Many people tend to maintain consistency in their investment plans for long-term retirement, making little or no change throughout their lifecycle. But self-directed brokerage accounts provide the investor with autonomy, flexibility and a plethora of investment options when it comes to making retirement investment decisions.

“Think of it as a supermarket where you choose what you want with no restrictions on product choice,” says William Rhind, founder and CEO of GraniteShares, a New York-based exchange-traded fund issuer.

“This differs from a lot of advisory platforms where you can only choose from an organized offering, so you only have access to a limited selection of investment products,” he said. declared.

Self-directed brokerage accounts allow investors to take control of their investment decisions. This way you choose your favorite investments and implement your own investment strategy. This hands-on approach to investing for retirement gives you more responsibility for managing your investments throughout their lifecycle.

A self-directed brokerage account offers investors a variety of investment choices, including mutual funds, exchange-traded funds, stocks, bonds, and many other asset classes. With a typical 401 (k), you are limited to the funds available. But Andrew Meadows, senior vice president of human resources, brand and culture at San Francisco-based Ubiquity Retirement + Savings, says, “Others might want to kick-start their game. investment.

Meadows says the main difference between a traditional 401 (k) brokerage account and a self-directed brokerage account “is the ability to use your retirement funds to access hundreds of new funds and thousands of combinations to leverage the get the most out of your savings as a wise investor ”.

The setup is simple. You open an account, transfer money and start investing in the fund. A self-directed brokerage account gives investors access to different types of investments. There are several asset options to choose from that best suit your goals.

A self-directed or solo 401 (k) is similar to an employer sponsored 401 (k). But this scheme is aimed specifically at self-employed workers. To be eligible for a self-directed 401 (k), you must be a business owner with no employees and earn taxable income. In this scenario, you are acting as both an employer and an employee, and contributions can be made at the same time.

Here’s how it works: You make pre-tax contributions, similar to a traditional 401 (k), which can then be invested for retirement. Investments are not limited to stocks, bonds, mutual funds, and other traditional retirement investment vehicles, but can be in various asset classes such as real estate, precious metals, and cryptocurrency. This way, you can customize your assets as you see fit instead of choosing a standard retirement fund.

A self-directed individual retirement account, or IRA, is held by a custodian and follows a similar concept. This account allows you to hold a wide range of assets, including alternative assets such as real estate or private equity. This could be a good option for investors who wish to withdraw part of their retirement account outside of the stock market. This account allows you to hold assets to invest with tax deferrals, but you may incur penalties if you withdraw early, just like with a traditional retirement account.

There are many advantages to investing with a self-directed brokerage account. First and foremost, you are the sole decision maker who guides your investments. Instead of choosing conventional investment vehicles like mutual funds or ETFs, you have the flexibility to tailor your investment portfolio to the assets with which you resonate.

With traditional and Roth IRAs, you may feel limited in your choice of assets. Self-directed IRAs, however, allow you to broaden your investment horizons.

“The investment world is literally your oyster in a self-directed brokerage account,” says Robert Johnson, professor of finance at Heider College of Business at Creighton University.

This flexibility of options allows you to invest in alternative asset classes including, but not limited to, private equity, precious metals, investment property, individual securities or startups.

“If you compare that with the limited offers within many business 401 (k) plans, you’ll see that a self-directed account gives you a lot more choice. Or if you compare that to going through a financial advisor. This advisor may be constrained in his investment choices, ”Johnson said.

More investment options provide portfolio diversification which can help protect your portfolio against market risk. Alternative assets tend not to correlate with assets traded in stock markets, which can be subject to volatility or inflation. You could also increase the possibility of stable returns and income.

The IRS does not allow certain investments in a self-directed IRA, such as works of art and antiques.

In a self-directed IRA, since the participant acts as both employer and employee, this pension plan allows you to have high contribution limits. A self-directed 401 (k) allows annual contributions for 2021 up to $ 19,500 or $ 26,000 if you are 50 or older. In terms of total contributions, the amount cannot exceed $ 58,000 for people aged 50 and over in 2021.

The goal of self-management is to take full ownership of your investment. This option can also help you avoid the types of fees that are incurred when working with an investment professional who would purchase investments and manage them on your behalf.

“Anything you can do on your own is usually the cheapest option,” says Rhind.

“Individuals can now invest through a variety of discount brokers, many of which offer commission-free trading in stocks and ETFs,” he says.

The reality is that the fees associated with investing can be onerous and can slow down your overall returns. The more money you save, the more you can invest.

By choosing the assets that best suit your personal retirement plan, you create a tax-deferred wealth that can increase your returns faster compared to a standard investment approach.

If you decide to open a self-directed brokerage account, you should be aware of the potential downsides of this approach.

The objective of investing is to have a portfolio that generates returns and has positive performance over time. This is difficult to achieve without years of experience, knowledge of global markets, and know-how to effectively position and allocate assets in your portfolio.

If you miss some of these areas or prefer to take a passive ‘set it and forget it’ approach to investing, you may not be able to afford the risk of controlling your retirement planning. In this case, the self-directed approach may not be suitable for your investment goals.

“Frankly, most investors don’t have the discipline or the expertise to direct their own investments,” says Trevor Ward, vice president of business development at BetterWealth, a financial planning department.

It is a hands-on approach to retirement investing where the planning and management are entirely up to you. This will require you to develop your own investment plan, do your due diligence on the investments you choose, stay on top of market dynamics, and make changes to your portfolio accordingly.

“Yes, there may be an opportunity for higher returns, but the tax rules surrounding these accounts can be very complex and the penalties for non-compliance severe,” Ward said.

According to Rhind, investing through a self-directed brokerage account means you are playing the role of an advisor or portfolio manager.

“This is an advantage for an investor who prefers to invest himself, but a potential disadvantage for someone who has less experience and needs more advice,” he says.

Taking control of your retirement with a self-directed brokerage account can increase your chances of building wealth on your own terms. But knowing what role you play throughout the process can help you get started on the right path.