Entrust New Direction Blog

A risk management technique that mixes a wide variety of investments within a portfolio. It is the spreading out of investments to reduce risks. Because the fluctuations of a single security have less impact on a diverse portfolio, diversification minimizes the risk from any one investment.

Most everyone is familiar with the concept of investment diversification. Any financial planner worth his/her salt will recommend that you refrain from putting all your money into one investment or one type of investment. Spreading wealth helps reduce overall loss potential.

Many people diversify their retirement wealth into different growth funds, balanced funds, index funds, small cap, large cap etc. There is a problem however with this view of diversification.....yes it is diversified....but only within securities and security related investments. But what happens when the stock market crashes? Did anyone's IRA stock portfolio feel strong in March of 2009? Did you experience some portfolio volatility on May 6th 2010 when the market dropped nearly 1,000 in less than ½ hour?

Would a car salesman sell you a bike?

There is a world of possible IRA investments outside of publicly traded securities. ‘Alternative' assets like real estate, private equities and notes are allowable investments for retirement plans and are essential to a truly diversified portfolio. The problem that most people run into is their current IRA administrator won't allow them to invest in alternative assets within their retirement plan. Quite frankly, why would they? A stock broker makes money by selling stocks. So if you call your stock broker and ask what you should invest your IRA into.... they will probably say stocks. If I go to a car dealership and tell them I want to buy something.... they will probably try to sell me a car. There are two reasons most banks and brokerage companies don't allow alternative assets within retirement plans:

1. They can't earn commission from selling ‘alternative' assets like real estate, private placements and private notes. If they can't make money off these investments they won't promote the fact that they are available. Unfortunately for us everyone knows what the big banks and brokerage companies do... not everyone knows how self-directed plans work.

2. They are not set up administratively to hold alternative assets. A real estate closing is quite a bit more involved than a simple stock or mutual fund investment. To make it work you need to have your IRA with an administrator that is specifically set up to hold alternative assets.

Obviously, securities are the biggest piece of the investment pie for most portfolios. There are roughly $4 trillion in IRAs currently in the US and the vast majority of those funds are in securities (in particular mutual funds). Alternative assets like real estate will never dethrone securities as the primary IRA investment. However, if you want a truly diversified IRA, you can't have everything in the securities market.

As a self-directed IRA administrator we cannot tell you what to invest your IRA or 401(k) into; however, we can provide for you the broadest spectrum of investment options. If you have IRA or other qualified funds, you can move a portion of those funds to an account with Entrust New Direction IRA and invest them in non-security related investments. Most of our clients don't move their entire portfolio into alternative assets.... because then they are losing the securities component of diversification....rather, they move a portion of their funds so they have some money in the market and some in alternative investments.

These are strange times we live in, both financially and otherwise, and now more than ever you need to know what your investment portfolio looks like and make sure all your proverbial eggs aren't all in one basket. If you have questions about what types of investments are permissible or how alternative assets can be incorporated into your IRA portfolio, please call our office or attend one of our upcoming events.

And in financial news from earlier this merry merry month of May, Fox news reported:

"A computerized selloff possibly caused by a simple typographical error triggered one of the most turbulent days in Wall Street history Thursday and sent the Dow Jones industrials to a loss of almost 1,000 points, nearly a tenth of their value, in less than half an hour. It was the biggest drop ever during a trading day."

The biggest drop ever thanks to one fat finger.

You may consider this old news (2 weeks ago is old news now), but the stock market is still where 98% of America's retirement dollars precariously reside, so until either the amount of cash or the amount of precariousness changes, this news won't get old.

Some dude fat-fingered my life savings away.

Let's backtrack for a moment. Fat-finger: When a typist mistakenly types a wrong or additional keystroke, thereby taking down the world's financial markets.

Okay, that last part was my own extrapolation. Anyone who works or plays on computers knows how easy fat-fingering is. Whether your fingers are, in reality, quite lithe, is irrelevant. The fact is, mistakes happen. Fat-fingering happens.

It happens so often, we have internet memes and cliches based on fat-fingering. Who hasn't typed teh when they meant to type the?

But when your retirement money is self-directed, YOU can catch the fat-fingering on a contract or other document. YOU decide whether to spend YOUR retirement money on whatever YOU choose in whatever amount YOU choose. YOU tell us if, when, and how you want to invest in your real estate IRA investment or your HSA gold investment or your whatever alternative investment. We do what YOU tell us. You are not dependent on a stranger a thousand miles away who doesn't care (or know) as much as you do. You only rely on YOURSELF.

Even though this specific day's disastrous plunge was supposedly not a fat finger, according to the SEC, this is a realistic, even likely possibility. People make mistakes, and in this era of huge numbers and speed-of-light transactions, wouldn't you rather make your own mistakes, with pen and paper? I know I would.

This most recent stock market plunge is yet another reason why I'm glad I have my retirement money in a real estate IRA investment and a gold investment. Find out how to move your retirement money to a self-directed retirement account and start making your own success (and your own mistakes). And please, if friends or family are still under the shadow of a potential fat-finger disaster, let them know they have another option.

401(k)s, developed in 1980 and popularized in the mid 80s, have been a mixed bag.  On the good, 401(k)s encouraged people to invest in their future self by saving money for retirement (and sometimes getting free matching payments from the company).  On the bad, because the 401(k) holder had little or no choice, they also encouraged holders to forget about where their money was going.  In addition, many companies (Enron is the blackest example) highly recommended investment in the company's stock, which is a great idea if you happen to work for Berkshire Hathaway.  

Of course, 401(k)s and how people think about them has changed recently with the death of the stock market.  Now, people know they don't want to invest in the stock market, but they don't know what to invest in.  We're here to help.  We never offer financial advice or take any commission on any investment - you decide what, when, why, where how much.  First step, move your 401(k) into a self-directed IRA.  Next step, decide what to invest in.  No ideas?  Take a look at some of these examples:

1) Real Estate IRA

Investing retirement money in real estate can take many forms - a rental apartment which pays your IRA monthly, a house which is held in an IRA until you decide to sell, even your dream home, which you can live in after you retire.  This real estate can even be in a foreign country, which opens your options greatly.

2)Land

Raw land can be purchased and held until the time is right to sell or build, purchased and leased for farm land or oil or cell towers - the possibilites are limited by your imagination.  As someone famous said, they're not making any more.

3)Gold and other precious metals

Your IRA can purchase gold coins, gold bars, electronic shares of gold.  Buy now, sell when the time is right, and you'll never have to worry about or pay for storage.

4)Loan

Your IRA can provide loans for friends, businesses, or non-profit associations.  If someone you know is paying 20% interest on a credit card, your IRA can loan them the money for 15%!  As long as a person is not a direct lineal decendent(or yourself), your IRA can loan them money. 

5)Private Stock

Find the next Microsoft, Apple or fill in your own successful business, and your IRA can buy some shares in them before they go public.  Nanotechnology, biotechnology, or your next door neighbor's fledgling cookie business, your IRA gets in before the world knows the true value of a start-up company.

Don't limit yourself or your future when you can take the DIY approach and direct your own retirement investment.  Ask a question or open an account. 

The Atlantic Monthly's Jeffrey Goldberg wrote an article this month exploring his options as a small-time retirement investor, "Why I Fired My Broker". He fired his broker, it turns out, because his broker never called him back. Fine reason, if you ask me. But he has many more reasons why everyone should fire their broker.

1. Your broker likely doesn't want you as a client.

Goldberg asked Larry Gellman, a very successful financial advisor, who described a dire situation for anyone with under $10 million to invest. Gellman said, "People like you are in a sort of purgatory because no one would ever come out and tell you that he doesn't want your business anymore. You had to figure that out by yourself."

Goldberg also asked Robert Soros (George's son and deputy chairman of the Soros fund) about his unresponsive financial advisor. Soros reports, "They were never your advisers. Do not for a moment think that a brokerage firm is your friend."

Ouch. (If your broker actually is your friend, maybe you could take him or her out to lunch. Be gentle.)

2.Your broker probably doesn't think you can make your money back.

Goldberg translates a video by Merril Lynch's top investment strategist: "You’re not going to make money on your investments in the next 10 years, or 15, or 20, so you should stop worrying about your portfolio and go to the movies like everyone else."

Of course, not everyone feels this way, especially if they have money in the stock market, but no one can predict how many years you'll need to regain the lost ground. If you've seen 20,30 or 40% loss in a matter of one or two years, do you have the patience to wait for another 10, 15, 20 years?

3. Your broker won't allow you to buy real estate.

At a cocktail party, Goldberg asks another successful investor about advice for the little guy. Bill Ackman said, in part, "Buy a house. I think it’s a great time to buy a house.... It’s one of the best investments you could make."

As we all know, real estate is pretty cheap right now. Loans are hard to find, and more and more Americans have to rent. Your IRA can be the landlord and your IRA can sell the real estate when you decide to sell, not when your broker recommends selling.

4. You can't get a loan on stocks and bonds.

Your broker can't direct you to a bank which will lend your IRA money to double your buying power. Such banks do not exist. Banks in general have not exhibited good judgement lately, but a non-recourse loan is always a good decision for the bank and an excellent decision for your retirement.

5.Your broker earns a commission on what you buy.

Many brokerage firms have products they call self-directed, but the only choice you have is among their products. Not much of a choice, if you're not a stock broker.

6. Your broker likely earns a commission on your transactions, motivating him or her to promote transactions.

Yes, if you pay excellent attention to the market, know the companies and the "rules", and wish to gamble on the uncontrolled activity, of course you should buy and sell frequently. But I prefer blackjack.

It's not your broker's fault. If your broker does call you back, tell them about self-directed IRAs. We'd be glad to get them started in a new direction.

Gallup released survey results today which may be obvious, if not a little frightening. Only 41% of Americans believe they will be able to retire "comfortably". Just five years ago, that number was 59%. This is not a survey taken in a retirement home, but among people who, in some cases, have almost fifty years to save and invest.

This speaks to the obvious. Most people's retirement money is tied up in stocks. The stock market has been wildly erratic, to be kind. What is not so obvious can be gleaned from the numbers - most Americans don't have confidence that the stocks will return, or at least will not return in time. But most Americans don't know that they have an option. Unfortunately, self-directed retirement plans are like an amazingly talented underground band that nobody knows. I believe, and maybe you would agree, that most Americans would choose to invest in what they know, not what some stock broker recommends.

The Gallup poll also reports that 52% of Americans don't think they will be able to retire comfortably. Over half. What are they doing about it? Panicking? Escaping from the unpleasant thoughts? Possibly they're hoping that the government will provide. If you know anyone in this predicament, please tell them that they have options. Retirement funds are not stocks or nothing anymore. They do have a choice.

Hopefully, you have a self-directed retirement account and can invest as you see fit. If not, fill out an application and free your retirement funds.