Ask the Adviser: How Can I Take Advantage of a Recession?

Girish asks, “I have heard people talk about ‘taking advantage of’ or ‘minting money from’ a recession. How does one do it?”

If you have cash you can find great bargains in almost any market or asset class – whether it is a stock, bond, mutual fund, buying tax liens or judgments or even real estate.  This is the classic sort of value investing espoused by Benjamin Graham and practiced masterfully by Warren Buffet.

Certainly, when stock prices are down you can pick up shares in companies with strong brands, franchises, marketing and cash flow but which may be temporarily out of favor because of investor fear.  This is certainly what happened during the Great Financial Meltdown.  Those who had the stomach for it and the cash to back it up could buy up many companies at bargain prices.

The key is having the cash and not being over-leveraged. There are lots of stories (most recently in BusinessWeek) about developers who are mortgaged to the hilt and unable to maneuver now as they are caught in a foreclosure squeeze.   Liquidity is really the key to crises.

If you have the cash and the stomach for the risks, you can buy into distressed areas of the market: tax liens, providing capital as a loan with equity kicker to an operating business that may be short of cash because banks are too timid to lend, real estate to fix up and rent (and later on use as a vacation property if you properly structure a 1031 exchange for example.

Some of these tactics can be done with non-qualified money. But one can even consider doing it through a self-directed IRA. Not every custodian is set up to allow this but there are some specialized non-bank custodians that will help set up such accounts. (One such custodian is PENSCO Trust). And the income that may be generated can be tax deferred allowing for more capital to be available for investment or to compound longer.

This is not a substitute for a broadly diversified investment portfolio but a supplement; you could call it the “opportunity” or “tactical” bucket.

The key is cash and an understanding of your personal risk profile. And most require a time horizon longer than a typical day trader’s.

Sure, the key to investing success is to buy almost anything low and sell it higher later.  But don’t limit yourself to just stocks.  There are opportunities beyond just stocks where astute and risk-tolerant investors can take advantage of what arbitrageurs call “information asymmetries.” And they may even be in your local market.

This is where a good financial adviser can help.

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Take Control of Your Retirement – Discover the Power of Self-Directed IRAs

Did you know that close to $4.2 Trillion in IRA and retirement account assets can be invested in much more than the standard run-of-the-mill investment choices offered at Big Box investment companies?

Ever since IRAs were first introduced in the 1970s, investors have been permitted to invest in a range of stock market alternatives including non-publicly traded assets such as real estate, notes and loans, private equity and tax liens.  But not many financial advisors and even fewer investors are fully aware of the options.

Legendary investor Warren Buffett uses a simple rule for success:  Invest in what you know and understand.  Diversification offers risk protection. And what better way to diversify than to own something that you have experience with like real estate or a business?

You may find greater portfolio diversification and a return-on-investment that might be better geared to meet your individual goals when you consider investing in what you know from experience.

Any IRA including a traditional IRA, SEP, Roth IRA, Coverdell Education Savings Accounts and solo 401(k) can use a portion of IRA funds to acquire interests in these various stock market alternatives.   Essentially, an investor determines the amount and source of the funds, transfers them to an independent third party custodian to hold and then instructs the custodian to release funds to acquire an investment in one or more alternatives.  The custodian also holds all income for the investor derived from the investment.

The “rules of the road” can be complex but not impossible to navigate with proper guidance.  Basically, an investor, spouse, lineal descendant or fiduciary advisor is a “prohibited person” and cannot “self-deal” or make personal use of the property.  With few exceptions, a “prohibited person” cannot work for or take income from an IRA investment.

What can an investor do?  Combine multiple IRAs from many individuals along with personal funds to buy property as co-tenants, for example.

It’s easier to list the things that a self-directed IRA cannot use as possible investments.  These include 1.) collectibles, 2.) life insurance contracts, and 3.) stock in a Sub-Chapter “S” corporation.  Most everything else is fair game.

If structured properly, the self-directed IRA can act as a lender to help facilitate a real estate transaction. Self-directed IRAs can invest as a member of an LLC or as a stockholder of a C-Corporation or even as a Limited Partner.  This is one way to add a level of asset protection to an investment.

Harnessing the power of a self-directed IRA may offer an investor a whole new way to invest and get retirement dreams back on track.

For a guide to Self-Directed IRA Basics including the “rules of the road” for avoiding IRS trouble spots, please call 617-398-7494 or email steve@ClearViewWealthAdvisors.com for a free copy of the notes from his presentation made to Greater Lowell Landlord Association members on November 11, 2009.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs.  Steve is principal of Clear View Wealth Advisors, LLC, a fee-only Registered Investment Adviser located in Amesbury and Wilmington and can be reached at 617-398-7494.

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