Most investors find sector-specific investments risky. However, with the surge in oil prices, it is advisable to explore energy investments to balance your self-directed IRA. Renewable energy sector has immense potential to develop. Recent government policies to boost renewable energy provide lucrative investment options in the sector.
Energy investments were practically unknown to the investor looking to protect his retirement portfolio, until recently. Even the passive investor is waking up to the volatile consequences of a series of disappointing economic events over the past few years. Investors need to have a complete understanding of the benefits of investing in energy assets through their self-directed IRAs.
Though a self-directed IRA provides you the freedom to select, invest and manage your portfolio, choosing a combination of direct and indirect energy investments makes your IRA portfolio powerful and balanced. Such a portfolio benefits from reduced taxes and asset protection. For example, you can avail tax benefits provided by the government, if you invest in renewable energy through your self-directed IRA.
Energy investments include investing in oil, natural gas, coal and renewable energy sources like solar energy, wind, or biomass etc. Investing in energy can take both the indirect and direct route. Energy investments through stocks and mutual funds form the indirect route whereas investments through limited partnerships or lease agreements take the direct route.
How to invest in energy?
In the current economic environment where oil prices reach higher levels everyday, investment options vary from picking the right oil stocks to investing in long-term master limited partnerships. Energy stocks that benefit directly from oil price rise are far and few in between. Oil companies that benefit from increase in oil prices are those that involve in oil transport and large and supporting players which can weather sudden drops in crude prices. If you are not one of those prudent stock pickers, ETFs and mutual funds are the next best options. They are long-term investments and provide diversified exposure to energy.
However, if you want to invest in profitable companies that are not affected by volatile oil prices, you can invest in master limited partnerships (MLP) with energy pipeline operators. They generate revenues through the volume of petroleum products transported through their pipelines. Thus, independent of oil price rise, they provide stable profits. MLPs are traded publicly on the SEC (Securities Exchange Commissions). They provide dividend income and act as an inflation hedge mechanism.
How do energy investments protect your portfolio?
The key attributes of the benefits of adding energy investments to your self-directed IRA include strong returns, risk diversification and inflation protection.
Strong returns: Due to the unprecedented rise in oil prices in the past few years, private energy annualized...