Self Directed IRA

Self-directed IRA investment basics:

Today many investors are concerned about the safety of potential investments and for good reason since the retirement account for most has been short of acceptable. And part of the problem is that investors don't have enough information about where and how to invest. Thus, we fall back on familiar products that may not be producing the desired results or at least not consistently.

In this series of articles we'll discuss what alternatives there are to the current standard which is the stock market. Let's take a look at what most investors have been taught as basic training in investing and how it applies to most portfolios.

The last time you sat down with an advisor a test was probably administered after a discussion of your objectives. The results of the test determined your risk tolerance and that tolerance determined the portfolio composition. For example, if you were a conservative investor then a portfolio that relied heavily on bonds was presented as a solution. This idea of risk tolerance also brought about several other perceptions and some of those perceptions are nearly myths. For example, low risk tolerance is equivalent to minimum return on investment or that bonds provide that emotional crutch that allows you to believe you have more control. Neither is perception is entirely correct. So to correct our investment compass we'll need to look at a few familiar terms and perhaps glean a new perspective on these familiar terms.

Alpha and Beta the ying and yang of investment. Earlier we discussed that conventional wisdom states that high return high risk. We have been given two markers to statistically measure the variance of each these deviant brothers. Alpha is the measurement potential of making a return on investment as compared to the investment universe. The farther above the number one the higher the “statistical” potential of a profit. Beta its depressed brother measured the potential of risk to your nest egg. The further you could go away from one in the opposite direction of Alpha the “statistically” safer your investment. Most portfolios in the past few years had too many yings and yangs hovering near the number one. Placing your potential return as wash at best. However, there were some products that performed well despite an ailing stock market and an economy that would have been considered to be healthy in the not so distant past. Those products were Real Estate Investment Trusts also known as REIT and mortgage securities. Their betas were quite low and the alpha ratings were decent defying common wisdom that low risk equaled low returns. Simply realigning one's portfolio to include these would have given a boost to many a retirement account. But that begs the question if these two types of investments did so well then could an investor do as well on their own creating their own REIT or delving into notes related to real estate. Certainly, it at least demands an education on how to measure the potential of these two investments products. But before we jump right in lets take a look at a couple of terms we'll need to know before we buy the neighborhood up.

Return on Assets - ROA. Now that may be a completely new term to some of you but it is not all that different from the familiar return on investment ROI which we’ll discuss next. ROA is typically used in businesses such as manufacturing where a manager makes a determination weather the purchase of an asset will bring an increase dollars to the bottom line and at minimum break even. Remember in our earlier discussion we learned that on a statistical basis or the comparison of an investment to the universe of investments the further above one we go the better chance of increasing the value. In the case of ROA the greater the distance from break even the greater the profit. On the opposite side of the coin the risk of the asset being in disrepair, cost of usage, lack of training or the asset not being used. ROA is the correct indicator and analysis guide to use when purchasing real estate with a dwelling.

Return On Investment – ROI. This measurement tool is best used when one purchases an asset such as stock or a mutual fund. In comparison to what we just read about ROA with ROI you are a passive investor rather than a active investor. ROI is the measurement tool that is used when you purchase notes or other paper. But that is a topic we’ll discuss in the next series.

Daniel Cordoba is a Certified Estate Advisor and Principal of Asset Exchange Group, LLC. Asset Exchange Strategies, LLC through its website http://www.MyRealEstateIRA.com helps investors gain greater control of their self-directed IRAs.