Investing Roth $

[Guest a_boyer]

My Roth IRA is invested at the moment in a REIT. If I think some other investment would return better, is it merely a case of calling my broker? Are there any limits on what I want to invest in--say, commodities, or overseas markets? What if I wanted to put the Roth money into yuan, for a little currency trading? Could I do that?

[John G]

Allowed investments are controlled by IRS regulations and the rules imposed by your custodian. You might start by calling your custodian/broker to find out what they will allow as it is likely to be more restrictive than the IRS. I am curious as to the advice you broker will give you. You did not say anything about your investment experience, age, academic training/field, investment goals, or if you were talking about just part of your assets.

From the tenure of your question, I would guess you are relatively new to investing. Assuming this, I will offer this reply:

Since what you can add to a Roth is limited by qualifications in any year and has a numeric maximum, you generally can not own an investment were you are exposed to unlimited liability. Why? Because there is no way for you to cover a bad investment. For example, a naked call is not likely to be allowed. However, with a covered call your downside risk is having your shares taken away. Currency trading is not for a casual investor, even companies like Dell and Kodak have had poor track records in this area and they have a lot of well trained staff. Currency trading takes many forms, so it is hard to generalize what would be allowed or disallowed. There are not too many forms of investing that are as exotic or as volatile. I would not recommend it for a retirement account.

The topic of allowed investments has come up a number of times, and I don't recall anyone having a definitive list of what the IRS excludes. I believe that collectibles are not allowed but can't find the reference in Publication 590. Real estate and shares of non-publicly traded companies have lots of limitations. Perhaps our tax accountants have a definitive list of prohibited investments.

I wonder why you want to get into complex and exotic investments? Do you know anything about these areas or have a successful track record over many years? If not, then I would recommend against your using IRA resources for any of these kinds of investments. One of the most true statements about investing is that if you don't understand in what you are investing, the odds of making money are vastly against you. There are over 8,000 domestic stocks, 8,000 mutual funds, 200+ stock indexes and thousands of bond choices. Surely you can find something more conventional in which to invest.

Sometimes folks get into the mode of chasing performance - wanting to buy what ever was hot the prior year. This is not a great long run stategy. The strongest areas of investing shift with changes in the economy, world news, government regulations and other events. In 2001, security companies and some defense related investments soared. Financial stocks have had a great run for two years when interest rates kept coming down. In investing, history is not a good predictor of future events. Investment cycles change in unpredictable ways.

You have said you are investing in a REIT. Which one? What do you know about this REIT? Why do you want to sell it? My only REIT for the last two years is CARS (the NAZDAQ symbol) and I sure wished I owned a lot more of it since it both paid great dividends and increased over 200%. I can tell you their business plan, their competitors, estimated earnings, hdq location, management team, how they finance growth, many of the properties they own, analysts recommendations, and recent comments from the last teleconference call. I bought this stock because I liked their niche and thought their business plan was sensible. Why did you buy your REIT?

Reaching the above level of detail is completely appropriate for individual investments. Some folks play hunches, and that is more akin to gambling then investing. When someone tells me they are not happy with their investments, I ask them name their top three investments and explain what the company does and why they bought it. Not many people can handle those kinds of questions, but that is the heart of investing. It is not about random decisions and guessing. Those folks are much more suitable to mutual fund investing. The requirements for exotic individual investments are even greater, since more volatile investments (like currency trading) require constant monitoring.

I have written this post partially for A_boyer, but more for readers who may be thinking they want to try other investments. We all know that expression "the grass is greener on the other side of the fence". Doctors investing in oil&gas. Petroleum execs investing in bio-med. When you invest in things you harldy know... the results are usually ugly. Some of those folks have posted on this web site... and they were not just dot.com investors.

It is hard not to be interested in some new area that promises a great return. But, chasing a high return exposes an IRA owner to higher risks. If you are systematically contributing every year to an IRA and started at a reasonable age, you don't need to chase those returns. It is boring but true to say "just grind it out, year after year". A 10% annual return means that your money doubles about every 7 years. For folks around the age of 50, this means that just your current assets should be 4x greater by the time SSN starts in the mid 60s. For folks in their 20s, a 10% annual return over many decades of IRA contributions will very likely give you over a million dollars in retirement assets.