Beginning to use a self-directed IRA is a little like driving a car for the first time. When you realize the amount of flexibility and control you have, it’s nearly overwhelming. Over time, however, driving your IRA’s investment decisions becomes familiar and easy. Because your choices and opportunities are nearly endless with a self-directed IRA, you'll want to learn a few basics to ease the task of managing your money.
Write out clear, reasonable and specific goals for your self-directed IRA. The National Endowment for Financial Education recommends beginning any investment strategy by writing down goals. Make them crystal-clear so you’ll have a better chance of finding investments that match your objectives rather than those that involve too much risk or are too conservative.
Decide which type of investments best meet your IRA objectives. Some investors prefer mutual funds because these investments are already diversified and can be professionally managed. Investors who like diversification but want lower costs and don’t wish to have professional management attached may prefer exchange-traded funds, which are baskets of investments that track an index, such as the Dow Jones Industrial Average. Investors who wish to make research, purchase and sale decisions alone prefer individual stocks and bonds.
Research your investment options. You can screen mutual funds at sites such as Morningstar.com, the Wall Street Journal Online or Yahoo! Finance. Similar sites, such as ETrade ClearStation and MarketWatch BigCharts, offer screens for individual stocks and exchange-traded funds. When comparing mutual funds, you should review expenses, management tenure and the fund’s past performance before buying. When researching exchange-traded funds, review fees and returns. For individual stocks, look for increasing revenues, consistent management and good products or services.
Purchase your investments. Mutual funds trade using a five-letter ticker symbol. With exchange-traded funds or stocks, the symbol may be anywhere from one to five letters long, so check the firm’s website for the correct symbol. Choose a market order or limit order based on your goals. Market orders purchase the stock or exchange-traded fund immediately, while a limit order allows you to place a predetermined target below the current trading price. Once the stock or ETF falls to your target price, a market order is automatically triggered, and you’ll purchase the shares.
Monitor your results carefully. Mutual funds and exchange-traded funds compete against an index of unmanaged investments, so compare your fund’s results periodically against the index. When reviewing stocks or bonds, review management changes, product offerings and company developments as well as price fluctuation to decide whether to keep the investment. In all cases, track your investments against your goals to ensure that your investments are bringing you closer to your desired result. If not, it’s time to sell and find investments that work in your favor.
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.