Self-Directed Investments Support Economic Development in Nicaragua

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Self-Directed Investments Support Economic Development in Nicaragua

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Background

I began my association with the New Haven/León Sister City Project, SOSTENICA and Alan Wright over 25 years ago. Since then I have been fortunate to be associated with a wonderful group of dedicated individuals who have continued to work and support the cause of social justice in Nicaragua and Central America. I have also been fortunate to be able to make a couple of trips to Nicaragua as a volunteer and view firsthand the plight of local businesses that have limited access to investment capital which would allow them to expand and thrive.

Previous Investment History

Like many individuals in the workforce today, I have traditional 401(k) retirement investments (from my days as a corporate employee) and a SEP/IRA from later on when I became self-employed. In both cases, these investment funds were initially controlled by financial advisors. Over the years, the markets, as everyone knows, have been up and down. When they were up the advisor took credit for the investment portfolio when they were down it was explained away as a ’market correction’. There was limited flexibility in the investments available as the financial advisors typically only put you into products that they sold.

Taking the Self-directed Route

About five years ago, I began to investigate the concept of ‘self-directed’ retirement investments. What this means is that you have total control over your funds and, with certain exceptions, you can invest in anything that you choose. This includes trading in stocks, purchasing real estate, investing in a business, investing in personal promissory notes and a number of other options. Initially I began to move portions of my portfolio to a fund I had been watching which had very good returns and a solid business model behind it. Over time I moved the majority of my assets from the traditional financial planner managed funds to being entirely self-directed.

Nicaragua / SOSTENICA

For the many years I have been associated with NH/L SCP, I have had an interest in doing more than local volunteering, making annual contributions, and the occasional trip to Nicaragua. When I heard about SOSTENICA, it seemed like the perfect vehicle to make more of a financial investment and become a stakeholder in the process as well. I began to take a look at allocating a portion of my self-directed investment portfolio to SOSTENICA. My vehicle for doing this was to create a personal promissory note, ‘lending’ funds to the SOSTENICA organization. The loan started out quite small but I was able to increase it little by little over the years. As part of a SEP/IRA retirement plan, these are funds that I couldn’t draw upon anyway without some kind of penalty.

Investing in Social Justice

For anyone interested in following a similar strategy, the first step would be to open a self-directed retirement account at one of any number of companies that provide this custodial service. I use Next Generation Trust in Roseland, NJ (http://www.nextgenerationtrust.com/) but there are a number of others that offer this service as well. Essentially, they act as the ‘custodian’ for your funds. What this means is that they insure your compliance with government regulations regarding the type of investment offered (see note below) and, if you take a distribution from your account they will issue you a 1099 at year end in order to record the income you receive. They do not offer any investment advice.

Once the account is opened and assuming your current 401(k) or retirement plan will allow it (many of them do), you can roll over some of your funds to your self-directed account with no tax penalty. From here you are free to determine how you would like to invest your funds. As I mentioned, you can trade stocks, purchase real estate, invest in a business or (in the case of SOSTENICA) invest in personal promissory notes.

The next step is to create a personal promissory note with SOSTENICA for the amount you wish to invest. A simple ‘template’ is available from Joe DeNicola at SOSTENICA. The terms and interest vary with notes having longer terms earning higher interest rates. At the end of each year, I roll my promissory note over and let the interest accumulate although I am free to cash out at that point should I choose. Joe makes the process very easy as I normally receive an email a couple of months prior to the due date. By just replying ‘Yes’ , I can roll the note over and he takes care of the paperwork and communications with Next Generation. You can also opt to just distribute your interest as a way of reducing your custodial fees.
Reward

As most people are aware, when you have money invested in a 401(k) or SEP/IRA you can’t access it until age 59 ½ or you incur a penalty and tax liability. Consequently, most of us leave it in for the duration. With an investment in SOSTENICA, while it is true that it is not ‘growing’ as it might in another area you have the satisfaction of knowing it is certainly reaping larger rewards and benefits than it would be in the stock market. It doesn’t have to be a lot of money to make a difference. I currently have about 2% of my portfolio invested with SOSTENICA, but started with a much smaller amount. I would encourage anyone who has an interest in furthering social justice in this part of the world to consider investing a small portion of their retirement funds in such a worthwhile cause.

Fund Stewardship

Over the years, I have found Alan Wright and the SOSTENICA staff to be excellent stewards of the funds that have been invested and applaud their dedication to the cause of helping those less fortunate in Nicaragua make a better life for themselves.

Richard Schulz

NOTE - As participant in a self-directed investment portfolio you are allowed to invest in anything except life insurance and antiquities. If there are any questions on a specific investment, you can contact your custodian for a clarification.