“Tech Start Ups” and Your Retirement – Venture Capital in a Self Directed IRA?

“Tech Start Ups” and Your Retirement – Venture Capital in a Self Directed IRA?

The New York Times (NYT) recently ran an interesting article on public mutual funds investing in technology start ups like Uber and Pinterest.  From the NYT article NYT article, Americans’ Retirement Funds Increasingly Contain Tech Start-Up Stocks :

“Big money managers including Fidelity Investments, T. Rowe Price and BlackRock have all struck deals worth billions of dollars to acquire shares of these private companies that are then pooled into mutual funds that go into the 401(k)’s and individual retirement accounts of many Americans. With private tech companies growing faster than companies on the stock market, the money managers are aiming to get a piece of the action.

“Fidelity’s Contrafund includes $204 million in Pinterest shares, $162 million in Uber shares, and $24 million in Airbnb shares. Over all, there were 29 deals last year in which a mutual fund bought into a private company, and they were worth a collective $4.7 billion, according to CB Insights. That was up from six such deals, worth a combined $296 million, in 2012. T. Rowe Price was the most active big investor, making 17 investments in private tech companies.”

This is controversial to some people. For those subscribing to the so called “greater fool theory,” retail investors and mutual funds are merely the greater fools to whom private shares in tech start up (like Uber) should be sold.   With self directed IRAs, individuals can invest in private companies directly. Just because you “can,” do we think you “should?”  That of course depends on the investment, but in general, our answer is a resounding “no!” Sure, the great success stories like – and – get some nice press, but the vast majority of these private company investments are failures resulting in a complete loss of the initial investment. Investors who’ve lost money don’t like to publicize their failures (and for good reason). Thus, we’d keep a balanced perspective on all private company investment, including in tech start ups, and generally say no to all private company investments. The SEC, who issued an investor alert in September 2011, we believe would agree with this cautious and skeptical position, too.

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