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Ask Money

Managing an IRA

Chris Farrell Nov 11, 2011

Question: Where can I find information about managing my own retirement IRA: I believe I can do no worse than the “expert” who manages mine and charges 1%. Bill,
San Angelo, TX

Answer: There’s no lack of information on taking a DIY approach toward managing your own IRA. You can build a well-diversified portfolio with low-cost no-load (industry jargon for commission costs) mutual funds. You can develop an investment philosophy or approach by looking at books such as the The Elements of Investing by Burton Malkiel and Charles Ellis. Data-rich companies like Morningstar offer the individual a wealth of market information.

I’ve always like these sentences from Warren Buffett, probably the greatest stock picker in at least a half century: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information, ” he wrote. “What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

So, here are my key rules of investing:

  • You can’t consistently beat the market.
  • Trading is hazardous to your wealth.
  • Managing risk is key

The practical implications are:

  • Keep fees razor thin
  • Own low-cost, broad-based index funds
  • Own quality “full faith and credit” bonds, bills, savings bonds, and the like

One caution on the term “self-directed.” I took you to man making the investment decisions on your own. This is done with the IRA most of use are familiar with–in its traditional or Roth form. Banks and broker-dealers are custodians. Investments in the IRA are limited to stocks, bonds, mutual funds and CDs. Think Fidelity and Vanguard. But you decide on your own how much to put into stocks, bonds, and so forth..

There is another meaning to self-directed, the so-called “self-directed IRA.” It’s a particular type of IRA. It’s held by a trustee or custodian that permits investment in a broader set of assets than is the case with most IRAs. Investors are allowed to put their money into other kinds of assets, such as real estate, promissory notes, tax lien certificates, and private placement securities. The fees are high. The securities are often hard to sell. The risks are disproportionate. To me, it’s a classic case of buyer beware.

So, yes, you can manage your own IRA investments. But I would be wary of a particular sub-specuies of the IRA, the self-directed IRA.

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