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December 14, 2012
In the 1978 movie “Midnight Express”, the sympathetic protagonist Billy, a US citizen, is caught trying to smuggle several kilos of heroin out of Turkey, and is sentenced to four years in a prison under horrific conditions. His hope for extradition seemingly dashed, he is resigned to living out his life in the mundane routine monotony of the incarcerated. His sentence is extended due to an aborted escape attempt and is later transferred to the prison ward for the criminally insane.
For a brief one hour each day, he is afforded the opportunity to exercise in the yard with his fellow prisoners. In a pivotal scene, instead of plodding along clockwise in formation with the crowd, something prompts him to move in the opposite direction, facing the crowd. This unorthodox move is met with raised voices and fists, the group insisting that he return to the slow, methodical clockwise shuffle. His singular intransigence in breaking from the crowd marks a metaphorical turning point, leading to his eventual escape from his sadistic jail-keepers.
This may be an apt metaphor for investors who choose to self-direct their retirement. When real estate prices decline and buyers are timid, our clients start to step in and seize the opportunity to secure cash flows unheard of several years ago. When banks no longer have the appetite to lend to investors, self-directed IRA holders emerge, meeting the need through private loans, securing great returns for their retirement plan.
Yet even within investment classes, the herd mentality of crowd investors is alive and well. For example, in 2011, investors flocked to gold in record numbers, including those using IRAs, pushing the spot price well over $1900 per ounce. Many of those buyers were looking to find a safe haven to protect against uncertain economic times and the Spector of looming inflation.
Since then, prices have retreated below $1700, with new investors turning their attention back to other markets. It seems like crowd investors have moved on, yet have the fundamental reasons changed? If gold was attractive at $1900, why is it less alluring when it costs less?
Now to be sure, I am not an investment advisor, nor would I ever pretend to be. Yet I can’t help but think that the majority of investors, and yes, those that advise those investors, are guilty of group-think. Why else would someone embrace the concept of owning a CD that yields 1.3% when so many other options exist that may provide better returns within their own risk tolerance?
For those of you self-directing your IRA, congratulations, you are moving away from crowd investors. For the rest of you, think about your choices, your outcomes, and come join us – just not so many of you that it becomes a crowd.