This article appeared originally in the August 2007 Levitt Letter.
State lotteries are a tax on the poor. (www.chattanoogan.com/articles/article_78676.asp) They exploit those who are incapable of calculating the near worthlessness of lottery tickets. Wall Street exploits those who are unaware that the brokerage industry is designed for the benefit of stockbrokers. “When it comes to selecting individual stocks, [the stock market] is about as rigged against the individual investor as Las Vegas is against the gambler.” That comment comes from my article, “Wise As a Serpent: Saving, Spending and Investing,” which appears on page 13 of the June ’07 Levitt Letter, posted at www.levitt.com.
It’s important to pay ourselves first (to save), eradicate debt, and not get sharked by financial “consultants” (read: self-serving salesmen). Financial columnist Scott Burns (www.dallasnews.com/business/scottburns) advises that stockbrokers, more often than not, do investors more harm than good. Their fees take large bites out of returns; the investments they push the hardest rarely out-perform the no-load (commission-free) mutual funds offered at www.vanguard.com (877-662-7447). Consider ordering a thin, worthwhile book by Daniel Solin: The Smartest Investment Book You’ll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals.
In most circumstances, eradicating debt is the smartest move once our savings surpass six months worth of our living expenses. The reason is that we typically pay more interest for borrowed money than we can earn on savings accounts and investments in general. Also, getting rid of debt is risk free. Once all of our debt is gone, however, and our savings grow beyond a practical reserve cushion, it is wise to consider investments with higher yields than money market accounts and CDs. Otherwise, inflation is likely to outpace the interest income, especially after taxes.
The bottom line is that those who are at least reasonably sharp may want to do enough reading on their own to minimize investment expenses by competently bypassing the bulk of the investment industry and then by staying in broadly diversified mutual funds with an extremely reputable brokerage firm. (Disregard, of course, the traditional “full service” brokerage firms’ heart-tugging advertising about putting their customers first or looking out for investors’ long-term goals. It’s marketing fiction—pure propaganda.) Fortunately, for anyone who wants personalized financial advice rather than self-service investing, Vanguard also offers a flat-fee consultation service for $500.