Stock-Picking Tips for Your IRA

As a special feature for April, TheStreet.com is offering a seven-part series on maximizing your IRA. This installment is Part 6. Click here for Part 1, Part 2, Part 3, Part 4, Part 5 and Part 7.

For most people, mutual funds and exchange-traded funds are probably the best options for IRAs. However, I must admit it is a bit discouraging to embrace a strategy that simply performs in line with the overall market.

Sure, a stock portfolio invested in an index fund will participate fully in the growth of the economy over time. But it seems positively un-American to accept mediocrity in investment results. Isn't there a way to obtain better-than-average results given the amount of risk taken? And can't those good results be achieved without spending an inordinate amount of time working on investments?

I personally think it is possible by doing three things:

• Commit to being an unemotional and independent investor.
• Concentrate your search for investment ideas to a universe of smaller, less widely followed companies.
• Be a mechanical investor.

The ability to trust in yourself and follow your set of investment principles no matter what is happening in the news is critical. The problems with the Iraq war, the Japanese carry trade or subprime mortgages should not even be on your radar screen when it comes to your investments. In addition, the future as seen in the crystal ball of your favorite analyst should be given very little weight in your investment decisions.

If you do go this route, I believe your best opportunities will be found in the smaller, less widely followed companies. This seems like pure common sense to me, since enormous companies have huge followings that generate even more efficient pricing than is normally present in the market. The best hope to find an attractively valued company is to look where most others are not looking.