The previous post explained how thousands of isolated self directed IRA/401k investors could all be making the same mistakes. I see that many self directed accountholders are pursuing high returns by simply taking high risks. I believe intelligent investing is about having an extraordinarily profitable risk/reward ratio – getting high returns with disproportionately low risk.

Let’s imagine that Bob sees that older, run down areas of his city are being redeveloped. Bob also sees that gas prices are going higher and higher, and he thinks that suburban sprawl will be reversed and bring people back into the central areas that are being redeveloped. If Bob’s speculation is correct, the demand for such areas will be increasing – hopefully rapidly.

So, Bob wants to buy a home in the centrally located area that is currently being redeveloped. Let’s say he has $300,000 in his IRA and these properties cost $250,000. So he identifies and purchases a home in the target area using his IRA. He may hit a home run with this investment, but what are the risks? [Read more...]