Erratic stock-market returns and persistently low interest rates have left a lot of investors worried about the performance of their retirement portfolios. A small but growing number are turning to self-directed IRAs -- accounts with third-party custodians that allow them to diversify their retirement savings beyond the typical mutual fund menu into investments such as real estate and community bank stocks.
When Leslie Gremett switched jobs earlier this year, she had accumulated about $9,000 in retirement savings. "I was leery of the stock market, so I asked some successful family friends for advice on where to invest my money," explains Gremett, a 28-year-old financial officer for a dental practice in Oceanside, Cal. That's how she learned that a new community bank near San Diego was looking for investors. "My former boss invested some money that way and doubled his money in five years."
So Gremett rolled over her 401(k) to a self-directed IRA with Trust Administration Services. Prudence would have dictated that she diversify her direct stock purchases, but she invested all $9,000 in Pacific Coast National Bank. Despite the recent trend toward consolidation among major banks, there are thousands of small community-based banks across the U.S. that fill a market niche by focusing on personalized service and small-business loans. When they grow large enough -- usually between $500 million and $1 billion in assets -- they often become targets for takeover by larger banks, which increases their value.
But before a community bank can open, it must raise funds directly from local investors. "The minimum investment is usually $2,500, so anybody in the community can invest," says Dan Hudson, president and chief executive officer of NuBank, a consulting firm that helps community banks get started and announces investment opportunities to the public.
Pacific Coast National Bank launched its initial public offering at $10 a share last November, raising $22 million. Recently, its shares traded over the counter for $12.50 -- a 25% jump.
We're not suggesting that you bet your retirement on community-bank stocks. Nor should your retirement savings be focused on a single investment. (Gremett now invests $100 a month -- which her boss matches dollar for dollar -- in mutual funds through the 401(k) at her new job.) But there is room in retirement savings for investing in a good idea outside the usual realm of mutual funds.
That good idea may be the stock of a community bank or a new young company whose product you use and like -- for example, Google when it went public in 2004 (its stock has more than tripled in value since the IPO). Whatever it is, investigate the company thoroughly. Read everything about it you can get your hands on. Find out about its leaders, its customers, its competitors and its balance sheet. Imagine what could go wrong. If you still see a winner, consider investing a portion of your retirement nest egg. If the stock prospers, so will your savings.