Self-Directed IRAs and Your ‘Circle of Competence’

The great investor Warren Buffett, chairman of Berkshire Hathaway and a legend among value-oriented investors, is fond of referring to a concept called “the circle of competence.’ This is simply a reference to the importance of concentrating your investment activities – including Self-Directed IRA investments – in assets that you know and understand.

It’s also one reason why an asset that may be a great match for one investor may be a poor match for another. Every investor is different, and while some investors may have similar goals to one another – we all want to secure a stable income for our retirement years, for example – there are many roads to get there. An investment should fit not only the investors’ goals but also his or her unique set of cognitive and emotional strengths and weaknesses.

This is an important part of why a self-directed retirement account, such as a Self-Directed IRA, can be a valuable component of your overall investment portfolio. If you have had a successful career in a given field, such as real estate, you may have market insights and contacts that can help you avoid much of the risk in a certain asset class, or help you attain an ROI that is tough to beat by adopting off-the-shelf investment strategies in, say, index funds and CDs and other conventional IRA assets.

When you open a Self-Directed IRA account with American IRA, LLC, you actually open the door to nearly any IRA investment you can imagine. Naturally, you’ll want to focus on the kinds of assets that you know very well, and where you may have a competitive marketplace advantage.

These are areas where you bring extra insight and expertise into projected returns and potential risks far beyond the norm, and where you might be considered “smart money.”

Let’s take a closer look at Buffett’s wisdom, which has stood the test of time, and the investment of real money:

Tom Watson [the founder of IBM] said, “I’m no genius. I’m smart in spots and I stay around those spots.” We have a lot of managers who are the same. You don’t want to compete with Pete Liegl [the CEO of Forest River, Inc.] because he’ll kill you in the RV business. But he doesn’t try to tell us how to run the insurance business.

As Sun Tzu wrote in the Art of War, if you know yourself and know the enemy, you may fight a hundred battles and never be defeated once. If you know the enemy and don’t know yourself, for every victory you are likely to suffer a defeat.

Narrowing down on the concept of ‘circle of competence,’ you must have a solid idea of what you circle of competence is – and to recognize when a certain investment lies outside it? Buffett’s business partner, Charlie Munger, was asked about that, and responded:

“We know the edge of our competency better than most. That’s a very worthwhile thing. It’s not a competency if you don’t know the edge of it.”

The Self-Directed IRA is valuable because it allows investors to bring their retirement portfolios into alignment with their own, personal circles of competence.

If you have questions about the possibilities of Self-Directed IRA investing and how that might relate to your own circle of competence, we’d like to hear from you. Contact us at 866-7500-IRA(472), or peruse our extensive library of information at