A Guide to Self-Directed Investing For Beginners

by | Aug 31, 2021

Self-directed retirement investing is to investors as DIY makeovers are to HGTV watchers.

Both are intriguing. Both provide you more control. You get more control in the decision-making process. And you get more control of the outcome.

You’ve diligently saved for retirement. Your accounts have done reasonably well over the years. You’ve experienced market ups and downs.

Now you’ve got a decade or two, or maybe less, until retirement. You’re curious and cautious about new opportunities like self-directed investing.

Well, you’re certainly not alone.

Investors today are increasingly seeking to self-direct their investments. These hands-on investors may be enrolled in plans like an IRA, 401(k), 403(b), or 457. They’re looking for additional options to diversify or supplement their core lineup of retirement investments.

Investors have investment ideas they want to explore. Some are simply tired of being locked into a limited selection of stocks, bonds, and mutual funds chosen by someone else.

Self-directed investing opens up opportunities for investors to get exposure to asset classes like real estate, loans, precious metals, and even start-up companies.

What Is Self-Directed Investing?

Roth IRA and 401K investment eggs
Self-directed investing is a bit self-explanatory. You’re directing your own investment choices.

Let’s look at the difference between a traditional IRA and a self-directed IRA.

A traditional IRA offered by your employer gives you very little control over what that IRA actually invests in.

But a self-directed IRA is just like it sounds. You control what your IRA invests in.

Want to dabble in stocks? Sure thing.

How about real estate? You can do that too!

Are you interested in start-up equity? That’s no problem with a self-directed IRA.

There are a wide array of options available to you. Only a few limitations are outlined by the IRS or the U.S. Department of the Treasury. Ultimately, you can let your expertise and your interests drive your investment choices.

4 Benefits of Self-Directed Investing

Benefit #1: Tax treatment of Self Directed IRAs

Depending on which type of investment account you select, you may even be able to enjoy tax advantages.

Self-directed IRAs can be tax-free or tax-deferred.

A traditional IRA account is tax-deferred. This means you’ll enjoy a tax benefit when you put the money into the IRA. The money will grow tax-deferred. But you will pay taxes upon withdrawal.

The earnings on a Roth IRA[2] account are considered tax-free.

The initial investment amount has already been taxed. When you withdraw the money eventually at retirement, you pay no tax. It doesn’t matter how much the account has grown in value.

Benefit #2: Larger Pool of Investment Choices Drives Diversification

With traditional investment plans, you’re only skimming the surface of the investment options available to you. But self-directed investors have complete control over their investment choices.


Because they are not limited to a list of funds chosen by someone else.

Wondering how limited the choices are if you’re not self-directing? To quickly see the difference between traditional retirement savings and self-directed savings, consider this:

  • There are thousands of mutual funds out there.
  • But a study by employee benefits firm BrightScope found that the average 401(k) offered only 28 different mutual funds to choose from[1].

Plus, most 401(k) plans don’t enable participants to invest in individual stocks or bonds.

A self-directed plan is like a Roth IRA. It provides direct access to all options available in the market. With self-directed investing, your options extend beyond a pre-selected bundle of stocks or mutual funds.

Benefit #3: Customization Drives Alignment with Your Unique Financial Goals

Some investors have creative ideas about how to invest retirement dollars. Self-directed investing enables that kind of creative freedom. Plus, you’re putting your money into investments that interest and excite you.

A self-directed plan like a Roth IRA provides direct access to all options available in the market. Those options extend well beyond a pre-selected bundle of stocks or mutual funds.

In addition to having more options, self-directed investing allows investors to:

  • Customize investment choices based on your unique investing goals
  • Have more control over your portfolio
  • Participate in alternative investments like futures, real estate, or private equity offerings

Benefit #4: Shelter and Safety

Self-directed investing enables you to invest in alternative assets. This means you can protect your gains from inflation risk.

Assets like stocks and bonds are most vulnerable to inflation.

By making a direct investment into an emerging industry, you improve your chances to take part in a lucrative opportunity without a middle-man or exorbitant fees.

Risk Considerations

Your portfolio of self-directed assets may be diversified to include a variety of instruments from different industries. As a result, your assets should then have a lower correlation to the stock market.

Diversification enables investors to be less impacted by the volatility of the stock market.

On the other hand, a self-directed IRA can come with additional risk.

You’re maximizing the diversification of your portfolio, but you’re also venturing into alternative asset classes. And with more risk comes the opportunity for more reward.

Examples of Self-Directed Investments

Below are just a few self-directed options.

Areas of Investor Expertise or Interest

Self-directed investing also provides the chance to take part in emerging industries.

Maybe you’re looking to get involved in industries that interest you. Or perhaps your unique expertise gives you some insight, and you want to leverage that.

When you self-direct, you can invest in any of the following:

  • Stocks of companies that interest you
  • Art galleries
  • Cannabis
  • Cryptocurrency
  • Crowdfunding
  • Improved or unimproved land
  • Retirement homes
  • Storage spaces
  • Show horses
  • Vineyards

Private Lending

One way to begin self-directing your investments is to lend money from your IRA.

Many business owners need additional capital to fund operating expenses. Some need cash to support inventory or capital expenditures.

These owners would jump at the chance to borrow money from you. And they’ll pay interest, of course.

Other lending opportunities include:

  • Real estate loans to finance residential or commercial projects or purchases
  • School or tuition loans
  • Automotive loans

The most important thing is to ensure you’re covered if the borrower defaults on the loan.

Private Equity

This might be the most interesting option because of the potential for a high upside. With private or start-up equity, investors can see many multiples of return on their investment.

Some funds or individual stocks have not yet been approved for trading on a public exchange. But with private equity investments, you can invest in those funds or stocks privately.

Early investors might get in on a “friends and family” offering when shares typically sell for less than a dollar.

This investment option is called private for a reason. Some private placements never reach the radar of the ordinary investor.

Ordinary investors don’t often participate in private equity for a few reasons:

  • They’re locked out unless they know one of the founders.
  • The risks involved are perceived as beyond their comfort zone. Investors must be financially sound enough to stomach significant risks.

But some investment advisors, holding funds, and crowdsourcing options are putting this option in closer reach.

By making a direct investment into an emerging industry, you have a unique opportunity. You get in on the ground floor – without a middle-man and without outrageous fees.

Performing and Non-performing Notes

This option doesn’t require a significant investment.

Notes can take the form of a secured residential mortgage loan. As the name implies, the loan is backed by actual real estate.

Investing with performing notes is easier if you hire a licensed mortgage servicer. This person acts just like a property manager hired to take care of the rental property.

The mortgage servicer handles the accounting, compliance, and other management tasks.

You can also invest in non-performing notes and mortgages. The borrower is currently not paying according to the terms in the note. That means two things:

  • The risk profile is very high. These notes and mortgages are not for the faint of heart.
  • These notes can be purchased at a huge discount.

Investors should proceed with caution. If you know how to manage this type of asset or partner with a professional in the non-performing note space, the returns can be significant.

Environmental, Social and Governance (ESG) Investing

This kind of investing was once an extremely niche sector. Now it can take several forms:

  • Sometimes, the strategy seeks to avoid specific “sin” industries. Sin industries include weapons, tobacco, and alcohol. Investors aim to avoid industries that involve products that can cause harm to others.
  • Investors will avoid certain companies because of their lobbying efforts.

Common investments include:

  • Solar and wind energy
  • Water power
  • Biofuel
  • Energy-efficient housing


Self-directed investing piggy bank.

Taking the Next Step

For investors who want to be in the driver’s seat, it is possible to take control of your investment decisions.


  • Look beyond traditional cookie-cutter investing strategies.
  • Allow adequate time for research.
  • Learn all about self-directed IRA investing.
  • Explore all your options to develop a sound self-directed investment strategy.

In addition, be sure to engage a qualified IRA custodian that specializes in the type of account[3] you select.

A custodian is a neutral third party who holds your investment, safeguards your transactions, and helps to ensure that you meet IRS regulations.

Custodians are considered neutral third parties because they are prohibited from giving investment advice.

Different custodians will specialize in different types of retirement accounts.

When choosing a custodian:

  • Ensure that the custodian can provide the flexibility and freedom that investors want when seeking a truly self-directed IRA.
  • Naturally, you’ll also want to consider their reputation, experience, portfolios, and fees.

The right custodian can help you transfer funds from other retirement accounts and get started self-directing your investments.

Photo of Warren Blesofsky, Co-Founder & President, Gladbrook

Warren Blesofsky

Co-Founder & President, Gladbrook

Warren is a scientist, real estate broker, environmentalist, and co-founder of the Sklar Center for Restorative Medicine. After graduating from UC San Diego with a Master's degree in Biochemistry, Warren has had several successes in medical research, alternative medicine, real estate, and distressed asset fund ventures. Warren and co-founder Ryan Elmore's mission is to improve our world's health, well-being, and enjoyment by investing in the future of cannabis and plant medicines.

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