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How to Assess Self-Directed Investments for Risk in the Post-Pandemic Market

How to Assess Self-Directed Investments for Risk in the Post-Pandemic Market

8/10/2021

As a self-directed investor, you are probably already used to being more creative, more self-reliant, and more flexible in your investing strategies than other investors. One of the best things about a self-directed retirement account is that it opens up the world of investments and asset classes to you in ways that “conventional” individual retirement accounts (IRAs) simply do not. By working with a self-directed IRA company to broaden your options for investing, you create a scenario in which you can dramatically accelerate your returns – not to mention your retirement, financial freedom, and the creation of a lasting financial legacy – simply by exerting a greater degree of control over your investments.

However, self-directed investors also bear a burden that comes with all of these advantages. As a self-directed investor, you bear the burden of risk assessment for your portfolio. This means it falls to you to analyze potential outcomes of any given investment, do research regarding potential problems that might arise during the course of an investment, and, if appropriate, enlist assistance to help you make a good decision regarding any investment opportunity. That is definitely harder than handing your investment capital to a traditional financial manager and trusting them to invest in “low risk” assets that often have a tendency to “break even” over the long haul rather than generating substantial returns. Of course, for some investors, relinquishing control of their retirement capital is the best way to protect it, but the odds are good that if you are reading this article then you are not among that population.

If you are reading this article, you are likely considering self-directed investing or you are already a self-directed investor, and that means risk assessment and risk management are crucial skills in your vast inventory of abilities. If you are reading this article, it also likely means you are struggling to reconcile post-pandemic investment strategy with traditional assessment models. After all, as we have all been hearing (and saying) for more than a year now, “COVID-19 changed everything!” We wrote this article to help you identify a few specific risk factors that must be part of your asset evaluation as you continue your self-directed post-pandemic investing.

Risk Factors To Assess

Do Not Overlook Recent State and Local Public Health Policy

Real estate investors have long known that holding assets in “investor friendly” states can make a huge difference when it comes to the cost of doing business as a landlord or a fix-and-flipper. However, many other self-directed investors overlook the importance of entrepreneur-friendly or small-business-friendly policy track records. Post-pandemic, you can no longer afford to continue to overlook policy and legislation as it relates to your investments. Take careful note of how a state or municipal area in which you are considering investing has handled the pandemic and how this has affected other investors holding similar assets. The track record will help you assess risk to your own investments in the event of another “wave” of COVID-19 or in the event of another national public-health disaster.

Also, investors should note: This is not a partisan issue. States on both sides of the aisle have made major errors and enjoyed major economic triumphs during the COVID-19 pandemic. The important thing is to evaluate how any state’s track record might affect your asset class of interest, evaluate various options for responding to potential health-policy problems in the future, and then make a decision about the quality of the potential investment.

Identify Reactive Trends to Economic and Pandemic Events

Pre-pandemic, we often heard investors talk about “recession resistance.” The idea is that certain types of assets are “recession resistant” because they are items that everyone needs in order to live (usually this list includes food, shelter, and clothing) or that people tend to prioritize when their budgets get tight (usually this list includes transportation, access to basic recreational and entertainment options, and schooling if households have dependent children). These factors determine how well an economy can withstand a recession and also tend to play a role in how unemployment rates may swing in a given market during recessions.

Prior to the COVID-19 pandemic, most financial and insurance industry centers were considered to be highly recession-resistant because banking and insurance tended to hold a “steady course” regardless of other market volatility. However, during the economic “lockdowns” of 2020, these industries suffered as their offices closed and they were forced to lay off workers both temporarily and permanently. While these “mega sector” industries are likely to regain most of their foothold in markets over time, they demonstrate how historically recession-proof or recession-resistant industries may not be pandemic-proof or pandemic-resistant as well.

Self-Directed Investing is More Important Now Than Ever

Thanks to COVID-19, many of the most predictable investments available to conventional retirement planners and financial advisors are no longer available. Every day, we talk to investors who are losing sleep every night because they no longer feel confident in the financial markets and bond markets alone to fortify their retirement. Self-directed investments do not have to replace traditional investments (although often self-directed investors find they prefer to do so), but they are an essential factor in your post-pandemic retirement security.

Always take the time to consult with trusted, professional advisors to ensure you understand tax, legal, and investment issues related to the use of IRA funds in LLCs.

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