Bigger risks come with stocks and bonds in self-directed IRAs

``Yes, sir. Interest rates certainly have fallen,'' says a smiling young bank clerk. ``Sorry, sir. We don't sell those IRA certificates of deposit yielding 13 percent anymore. But if you'd step over to that desk there, our discount broker may be able to show you a good return in a self-directed IRA.''

There's a good chance this scenario is being repeated often. Interest rates are in the pits. The stock and bond markets are on a once-in-a-lifetime rally. Why not tap that bull market with your own self-directed IRA?

Indeed, brokerage firms and mutual fund concerns say the rush is on. Business is up 20 to 40 percent over last year, while banks report flat to declining sales overall.

The self-directed IRA is a tax-free account with a broker that lets you choose where to invest your money for the best return. You're not locked into one type of investment. You can buy and sell stocks, bonds, Ginnie Maes, and a potpourri of mutual funds. The only investments off limits to IRAs are tangibles (gold, diamonds, oriental rugs, etc.) And you cannot use margin (borrow from your broker) to beef up your stock holdings.

But before jumping into a self-directed IRA, consider the added risks that accompany higher returns. Do you want to be a portfolio manager? Do you have enough money to mitigate some of the risk? And remember, this is retirement money.

Lately, one hears that people with about $10,000 socked away in bank IRAs should consider putting at least some oftheir holdings into stocks and bonds.

But $10,000 is not enough -- at least for an investment in stocks -- say financial planners contacted by the Monitor.

``You need to get well over $50,000 before you think about putting a portion into individual stocks,'' says Mary A. Malgoire of Malgoire Drucker Inc., a fee-only financial planning firm in Bethesda, Md.

Claire Longden, first vice-president of financial planning at Butcher & Singer, a New York brokerge firm adds: ``If you have $8,000 to $10,000, I would not put any part in equities. It's an unnecessary risk.''

But both would advise IRA holders to seek a better return and diversify holdings. They suggest a no-load mutual fund or a family of mutual funds. ``I'm a proponent of using no-load funds to build your IRA up to $50,000,'' says Malgoire. Fund families have all the basics -- bonds, stocks, growth, income, international -- to allow you to diversify. You're going to make money with the right combination.'' A no-load fund charges no entry fee and does not require a broker to open the account.

If your retirement funds and investment skills are sufficient, what should one consider in setting up a self-directed account?

You'll have to choose between a full-service brokerage or a discount firm. The full-service broker probably offers a broader investment menu to choose from. Some discounters are strictly meat and potato (stocks and bonds) outfits, although most are broadening their selection.

If you're a novice trader or don't want to spend time following business developments affecting your securities, the advice of a full-service broker may be worth the added commission expense. If your account is small, you will probably make fewer trades so commission fees won't be as significant a factor.

The more sophisticated investor may want to shop around for a discount broker. If so, pick one or more standard-size trades you're likely to make and compare rates. For instance, ask several firms ``What would it cost to buy and sell 100 shares of a $35 stock.''

The fees for opening a self-directed account run about $25 to $30. Then another $15 to $30 is charged each year as a maintenance fee. And if you close the account, that's perhaps another $50 out of your pocket. There's not much of a spread in pricing, although some discount brokers (Charles Schwab & Co. and Rose & Co., for example) skip these fees.

What about an investment strategy?

Some advise picking the ``riskier,'' less-expensive stocks of young companies. Prices may fluctuate in the near term, but over the long haul a growing company offers higher returns than fixed-income securities or a sluggish, high-priced firm in a mature industry. And a growth company may be less susceptible to overall economic downturns.

But Ms. Malgoire tells her clients ``not to shoot for capital gain-type investments.'' Rather she suggests a more conservative type of investment where you might sacrifice some growth to preserve your principal.

``You want a high-dividend paying stock or stock fund, so [stock price] appreciation is icing on the cake.'' Indeed, in recent years such a strategy could have produced the same (or better) returns as buying smaller-priced issues.

From a planning standpoint there are advantages, too. Malgoire explains that if the value of your account rises consistently, rather than up some years and down some years, it's easier to calculate what your benefits are going to be at retirement. If your IRA performs poorly over a couple of years, then you may have to put more money into your IRA just to get the retirement payout you've planned.

Also, remember when trading stocks in an IRA account, a stock loss, is a loss, is a loss. Yes, you get the bonus of not having to pay a tax on capital gains. But there's no assuaging your pocketbook and pride by writing off stock losses against income.

Of course, a self-directed IRA can be used to buy certificates of deposit and bonds. Broker CD rates may be one-half to 1 per-cent higher than the banks. And it may be cheaper to buy several bonds from a broker if you're considering a bond mutual fund with a load.

Ms. Longden at Butcher & Singer says if you think interest rates have bottomed out, avoid zero coupon bonds. ``If rates move up, a [bond] mutual fund will participate. It's not without interest rate risk, and it will trail a rise in rates but should give some protection.''

In the end, with a self-directed account, you're the money manager. Think twice before jumping on a hot stock tip. Diversify your holdings. And bear in mind, this is nest-egg stuff -- retirement money, not Wingo money.

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