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For readers who are wondering how new tax laws might affect their own personal investments, or how to trade on the stock market with a broker or on their own with a computer, or how to set up a college fund mindful of state regulations, or countless other personal finance questions, it's time to turn to Andrew Tobias and The Only Investment Guide You'll Ever Need. For more than twenty years this book has been America's bible for personal money management. Now it is even more indispensable. Fully updated to cover ...
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For readers who are wondering how new tax laws might affect their own personal investments, or how to trade on the stock market with a broker or on their own with a computer, or how to set up a college fund mindful of state regulations, or countless other personal finance questions, it's time to turn to Andrew Tobias and The Only Investment Guide You'll Ever Need. For more than twenty years this book has been America's bible for personal money management. Now it is even more indispensable. Fully updated to cover new legislation, and expanded to include the Internet world, America's favorite finance guide covers every aspect of investing and answers every question about managing money smartly and safely. Concise, witty, and truly understandable, this book offers the best personal finance information for every income level.
—How to save by spending more wisely
—When to invest in stocks, and when not to
—Tax strategies for everything, from IRAs to charitable contributions
—How to set up college funds
—What does life insurance really do?
—Is real estate wise?
—What to do with that big inheritance and much, much more.
Here you are, having just purchased a fat little investment guide we'll call Dollars and Sense, as so many investment guides are (although the one I have in mind had a different title), and you are skimming through idea after idea, growing increasingly excited by all the exclamation marks, looking for an investment you would feel comfortable with. You page through antique cars, raw land, mutual funds, gold—and you come upon the section on savings banks. Mexican savings banks.
The book explains how by converting your dollars to pesos you can earn 12% on your savings in Mexico instead of 5 1/2% here. At 12% after twenty years, $1,000 will grow not to a paltry $2,917, as it would at 5 1/2%, but to nearly $10,000! What's more, the book explains, U.S. savings banks report interest payments to the Internal Revenue Service. Mexican banks guarantee not to. Wink.
The book does warn that if the peso were devalued relative to the dollar, your nest egg would shrink proportionately. But, the author reassures, the peso is one of the stablest currencies in the world, having been pegged at a fixed rate to the dollar for 21 years; and the Mexican government has repeatedly stated its intention not to devalue. Now, how the heck are you, who needed to buy a book to tell you about this in the first place, supposed to evaluate the stability of the Mexican peso? You can only assume that the author would not have devoted two pages to the opportunity if he thought it were a poor risk to take—and he's an expert. (Anyone who writes a book, I'm pleased to report, is an expert.) And, as a matter of fact, you do remember reading somewhere that Mexico has oil-pretty good collateral to back any nation's currency. Anyway, what would be so dreadful if, as your savings were doubling and tripling south of the border, the peso were devalued 5% or 10%?
So, scared of the stock market and impressed by the author's credentials, you take el plunge.
And for 18 months you are getting all the girls. Because while others are pointing lamely to the free clock radios they got with their new 5 1/2% savings accounts, you are talking Mexican pesos at 12%.
Comes September, and Mexico announces that its peso is no longer fixed at the rate of 12.5 to the dollar, but will, instead, be allowed to ôfloat.ö Overnight, it floats 25% lower, and in a matter of days it is down 40%. Whammo. Reports the New York Times: ôDevaluation is expected to produce serious immediate difficulties, most conspicuously in heavy losses for Americans who have for years been investing dollars in high-interest peso notes.ö How much is involved? Oh, just $6 or $8 billion.
You are devastated. But you were not born yesterday. At least you will not be so foolish as to join the panic to withdraw your funds. You may have bought at the top but you'll be damned if you'll sell at the bottom. The peso could recover somewhat. Even if it doesn't, what's lost is lost. There's no point taking your diminished capital out of an account that pays 12% so you can get 5 1/2% in the United States.
And sure enough, in less than two weeks the float is ended, and the Mexican government informally repegs the peso to the dollar. (Only now one peso is worth a nickel, where two weeks ago it was worth eight cents.) You may not know much about international finance (who does?), but you know enough to sense that, like a major housecleaning, this 40% devaluation in Mexico's currency ought to hold it for a long, long time. In fact, you tell friends, for your own peace of mind you're just as glad they did it all at once rather than nibbling you to death.
And then six weeks later the peso is floated again, and slips from a nickel to less than four cents. Since Labor Day, you're down 52%.
Aren't you glad you bought that book?
(Everything changes and nothing changes. That was 1976. In 1982 the peso was devalued again—by 80%. In 1995, it dropped 55%. From mid-2002 to mid-2004, it edged down 20%.)
This immodestly titled book-the title was the publisher's idea, in a weak moment I went along -is for people who have gotten burned getting rich quick before. It is the only investment guide you will ever need not because it will make you rich beyond any further need for money, which it won't, but because most investment guides you don't need.
The ones that hold out the promise of riches are frauds. The ones that deal with strategies in commodities or gold are too narrow. They tell you how you might play a particular game, but not whether to be playing the game at all. The ones that are encyclopedic, with a chapter on everything, leave you pretty much where you were to begin with—trying to choose from a myriad of competing alternatives.
I hasten to add that, while this may be the only investment guide you will ever need, it is by no means the only investment guide that's any good. But, sadly, reading three good investment guides instead of one will surely not triple, and probably not even improve, your investment results.
The odd thing about investing—the frustrating thing—is that it is not like cooking or playing chess or much of anything else. The more cookbooks you read and pot roasts you prepare, the better the cook-within limits—you are likely to become. The more chess books you read and gambits you learn, the more opponents—within limits—you are likely to outwit. But when it comes to investing, all these ordinarily admirable attributes-trying hard, learning a lot, becoming intrigued—may be of little help, or actually work against you. It has been amply demonstrated, as I will document further on, that a monkey with a handful of darts will do about as well at choosing stocks as most highly paid professional money managers. Show me a monkey that can make a decent veal parmesan.
If a monkey can invest as well as a professional, or nearly so, it stands to reason that you can, too. It further stands to reason that, unless you get a kick out of it, you needn't spend a great deal of time reading investment guides, especially long ones. Indeed, the chief virtue of this one (although I hope not) may be its brevity. This one is about the forest, not the trees. Because if you can find the right forest-the right overall investment outlook-you shouldn't have to worry much about the trees. Accordingly, this book will summarily dismiss investment fields that some people spend lifetimes wandering around in. For example: It is a fact that 90% or more of the people who play the commodities game get burned. I submit that you have now read all you need ever read about commodities.
This thing about the forest and the trees—about one's degree of perspective—bears further comment, particularly as for many of us it is second nature to feel guilty if we take the easy way out of a given situation. If, for example, we read the flyleaf and first and last chapters of a book, to get its thrust, instead of every plodding word.
I raise this not only because it could save you many hundreds of hours stewing over investments that will do just as well unstewed, but also because it leads into the story of The Greatest Moment of My Life.
The Greatest Moment of My Life occurred in the Decision Analysis class at Harvard Business School. Harvard Business School uses the case method to impart its wisdom, which, on a practical level, means preparing three or four cases a night for the following day's classroom analysis. Typically, each case sets forth an enormous garbage dump of data, from which each student is supposed to determine how the hero or heroine of the case-inevitably, an embattled division manager or CEO-should ideally act. Typically, too, I could not bring myself to prepare the cases very thoroughly.
The format of the classroom discussion was that 75 of us would be seated in a semicircle with name cards in front of us, like United Nations delegates, and the professor would select without warning whomever he thought he could most thoroughly embarrass to take the first five or ten minutes, solo, to present his or her analysis of the case. Then everyone else could chime in for the rest of the hour.
On one such occasion, we had been asked to prepare a case the nub of which was: What price should XYZ Company set for its sprockets? Not coincidentally, we had also been presented with a textbook chapter containing some elaborate number-crunching way to determine such things. The theory behind it was simple enough-charge the price that will make you the most money-but the actual calculations, had one been of a mind to do them, were extremely time-consuming. (This was just before pocket calculators reached the market.)
The professor, a delightful but devious man, noting the conspicuous absence of paperwork by my station, had the out-and-out malevolence to call on me to lead off the discussion. I should note that this occurred early in the term, before much ice had been broken and while everyone was still taking life very seriously.
Copyright © 2005, 2002, 1998, 1996, 1989, 1987, 1983, 1978
by Andrew Tobias
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher.
Requests for permission to make copies of any part of the work should be mailed to the following address:
Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive,
Orlando, Florida 32887-6777.
|1||If I'm So Smart, How Come This Book Won't Make You Rich?||3|
|2||A Penny Saved Is Two Pennies Earned||13|
|3||You CAN Get By on $165,000 a Year||35|
|4||Trust No One||48|
|5||The Case for Cowardice||57|
|7||Meanwhile, Down at the Track||111|
|8||Choosing (to Ignore) Your Broker||139|
|9||Hot Tips, Inside Information - and Other Fine Points||153|
|10||What to Do If You Inherit a Million Dollars; What to Do Otherwise||178|
|App. How Much Life Insurance Do You Need?||195|
|App. How Much Social Security Will You Get?||199|
|App. Cocktail Party Financial Quips to Help You Feel Smug||203|
|App. Selected Discount Brokers||205|
|App. Selected Mutual Funds||206|
|App. Fun with Compound Interest||210|
Andrew Tobias: Thanks for having me. The basic ideas are as they were 20 years ago, but some specifics change. For example, in the last five years we've seen the arrival of a thing called the Internet. Commissions, which used to be prohibitive, really can now be trivial. And there's the Roth IRA, there's Treasury Direct -- lots of specific little ways to shop smarter, get better deals. It was fun adding all this.
Andrew Tobias: My head tells me it should be a rough year. After all, valuations are historically very high. Greenspan used the phrase "irrationally exuberant," albeit not specifically or directly about the U.S. market, less than two years ago, when the Dow was 6,500. Today, as you know, it's over 9,000. We have Y2K to worry about, impeachment, maybe a bit of global financial collapse, and the market totally shrugs off everything. My head tells me trouble looms one of these days. But logic and one's head are only half the game. When will euphoria end? Who knows? Did it just end for Yahoo! and the rest this week? Or is that just a breather? I don't know.
Andrew Tobias: The big advantage of the Roth IRA is that it lets you put more under the tax-deferral umbrella. Yes, it's $2,000 either way, but with the Roth it's $2,000 after-tax money, which means you have, in effect, saved maybe $3,000 pretax dollars. So usually, if you can afford it, Roth is better. But naturally, if you are in a 40 percent tax bracket this year and will retire next year and move to a no-tax state and drop to the 20 percent bracket, there's no point giving up the deduction this year. But most people aren't in that situation.
Andrew Tobias: Six of one.... In the kid's name, you can save on taxes, but the college may expect more of that money to go for college. So there's no clear-cut answer.
Andrew Tobias: The paradox is that high-tech is the future (and to me a very exciting one) of our economy -- our species, even. Yet the prices of the stocks, in my view, more than reflect this already, for the most part. And those who are just jumping in casinolike, without special expertise in a specific field (they don't themselves work in the industry, et cetera), are just feeding the commission slots, paying the spreads between bid and asked and, generally, racking up short-term (fully taxable) gains when they win. They've won for so long, I worry that a hefty correction may come one day.
Andrew Tobias: So many possibilities. And I hope it would be joined by, or be joining, lots of other $10,000s. But the kind of thing to think about might be to split it among some closed-end Asian mutual funds, on the theory that one day Korea and Japan and Thailand and India, et cetera, might come back. It was barely a decade ago that people pretty well imagined Japan would overtake the U.S. Look what happened. Now we imagine Asia is over forever and the U.S. market will just keep zooming. Maybe not.
Andrew Tobias: The Internet itself is very much here to stay and just in its infancy, with profound implications (mostly good for consumers). But the crazy valuations? A few of these companies may actually grow into today's prices. Many, I think, will turn out to have been classic bubbles. Did we see the top last week? I kind of think so, but if I know anything, it's that I don't know.
Andrew Tobias: Well, he's been impeached. No effect. This miserable trial is going on -- no effect. If he was convicted and we had Al Gore, it's easy to posit no effect. It's easy to posit an excuse to rise, because the uncertainty of trial, et cetera, would be over. And it's easy to posit fall, if this finally broke the "spell" that has tipped the eternal fear/greed balance to greed (not bad greed, you understand, just fear of missing out on profits). What causes someone's depression to lift? Or a funk to fall? It's probably as hard to say for markets as for people. And very often the events of the day are not the causes of these mood swings, but rather the handy explanations.
Andrew Tobias: Well, of course, going to a sales tax and getting rid of the income tax would sure make Roth folks feel a little foolish -- there was no tax at withdrawal anyway! But I sure don't see that happening, and I sure don't see Congress messing around with seniors' benefits when they will be such a huge portion of the electorate. Only at the fringes might this happen, if they started counting withdrawal money toward calculations for other things, like eligibility for Social Security benefits. But you pay your money and you take your chances....
Andrew Tobias: I would try very hard to fully fund ($2,000) the Roth IRA (a Roth because with low salary, you have a low tax benefit from the traditional IRA). I know it's hard -- especially because it's also so important to rip up those credit cards and get off the 18 percent (or 22 percent!) debt treadmill just as soon as you can. Not having to pay 18 percent or 20 percent is as good as earning it tax-free -- risk-free! An astonishing return. I guess if you could only do one, it should be pay off the cards. But really. And then, ASAP, start funding the IRA.
Andrew Tobias: Down, as global crises require further easing of rates and as deflationary tendencies (including the great effect of Internet shopping on prices, cutting out middlemen and making things ever cheaper) keep inflation low. Up, because people will fear Asian and Latin American inflation, needed to stave off global collapse. Maybe IMF will change its traditional model, which seems to be killing, rather than rescuing, economies lately. So...I don't know, and no one else really does either.
Andrew Tobias: Sure! Especially if you don't plan to stay put for a while, because the transaction costs of buying and selling can be quite large. But even if you do plan to stay put, that's no reason to buy into a really high market. In some places, prices have gone through the roof, maybe tied to Wall Street riches. In other places, values may be okay. But life is not a business, as my dad used to say, so if you do love a house or condo, and can afford it, you may want to buy even if it doesn't turn out to be the absolute shrewdest investment you can make. Certainly mortgage rates are great these days.
Andrew Tobias: Sorry, I don't know.
Andrew Tobias: I'm going to have the same kind of supplies I'd have for a hurricane or ice storm or earthquake or whatever kinds of potential problems you have in your part of the country. I actually think we're likely to muddle through reasonably well, but there is the genuine (small) risk of considerable disruption. So we are better off as individuals, but also as communities, if we all can get by okay for a week or two without running out of small bills, small food, small cans of Sterno, matches, ketchup -- the essentials. I also think just-in-time inventories and such will be rejiggered, and that all this could certainly cause a recession or odd business cycles, or change the psychology we talked about earlier. So I wouldn't be in the stock market on margin betting that everything will always go up, up, up.
Andrew Tobias: Absolutely keep it in a tax-sheltered vehicle -- the new 401(k) or your own rollover IRA. I don't know the details and choices of the new 401(k), but take a close look before giving up on it.
Andrew Tobias: The surest way to lose money is to try to make money quickly. Sad (and boring!) but true.
Andrew Tobias: Sign up with an online Internet banking account, for one thing, to make payments easy. Likewise an Internet broker, for investing.
Andrew Tobias: DRIPs (dividend reinvestment plans) are excellent from a personal-discipline point of view, and great for effortless reinvestment, et cetera. Logically, if you were a zillionaire, it wouldn't make a lot of sense, because it's basically saying, Of all the things I can do with my money, the best investment at any given time happens to be the same company that happened to pay this dividend. So for big investors: nah, at least logically. But for convenience and good savings habits, et cetera: yep.
Andrew Tobias: Be very nice, always come over for Sunday dinner, and accidentally leave Money magazine open to the periodical estate-planning articles it (and everyone) run, which explain that each parent can give up to $10,000 a year to each child (and grandchild and anyone else) free of gift or estate tax (so $20,000 a year from the two of them jointly to each child).
Andrew Tobias: Because mutual funds are sold, and you have to be a buyer, not a seller, to choose index funds. That's one of the things my book pushes: to be a buyer (in everything, not just mutual funds), not a seller.
Andrew Tobias: If you can afford to do both, for sure do both. If the 401(k) involves an employer match, that is definitely the one to do first, and fully. Nothing beats free money.
Andrew Tobias: I'm sure there are much better, much more sophisticated answers (in other words, I haven't a clue). But I like to think, in my wildest dreams, that the world and the world capital markets -- awash in cash, incidentally, from our own 401(k) contributions, from Japanese oversaving, et cetera -- somehow sense that a new era is at hand: less money spent on war and trade wars, a global binding of people through communications and things like America Online circling the whole world, almost-free communications among people everywhere, and so on; and that Brazil's problems and a lot of others will be solved, so we're skipping the panic phase. Of course, there's an equal chance that this is just part of the dream-on mindless euphoria, and we are about to plunge into another Dark Ages. [grins] Best of luck to all....
Andrew Tobias: Ameritrade.
Andrew Tobias: The odds are pretty good, now that you've posted this message. [grins]
Andrew Tobias: Shop at barnesandnoble.com. It does a great job.