Don't be an investing "muppet"

How to avoid becoming a Wall Street muppet

Excerpt:

With three layers of agents, everyone has their hand in your pocket. That’s what defines a muppet! Here are three ways to reduce agency risk:

1. RIA vs. broker: Do you know the difference between a registered investment adviser (RIA) and a broker? They are as distinct as chiropractors are to orthopedic surgeons. RIAs are regulated by the Securities and Exchange Commission and are not allowed to earn fees from any source other than you. Conversely, brokers can be paid in many ways that you don’t see. Spend some time learning this critical difference. While you are at it, search the term “breakaway brokers” and learn why brokers are leaving their firms in droves to start up RIA firms so they can operate with less conflict.
2. Index funds vs. actively managed funds: Most investors don’t know the difference between an index fund and an actively managed fund. If you are one of them, do some homework. With an index fund or exchange-traded fund, you can save on fees and replace fund managers with computers that buy every stock in a particular market. Performance? The statistics are indisputable — owning active funds is an expensive loser’s game. That’s one reason why Vanguard Group, which created index funds, is now the largest money manager in the world with $1.75 trillion.
3. Clearing brokers: Where your money is located is a critical decision. Make sure that your money is held by what is called a “clearing broker,” like Charles Schwab or Fidelity Investments — not your local independent broker dealer. Clearing brokers are much more regulated and plugged into what is called the Depository Trust and Clearing Corporation (DTC). This dramatically lowers the risk of fraud and helps insure that no one but you can move money out of your account.

Enjoy watching the Muppets; don’t become one. Having your own account at well-known firms such as Schwab and Fidelity, with an independent adviser (not a broker) buying you a portfolio of index funds, means you’re investing with fewer strings attached.

Comments:

• This is hard to do (if you like the person) but fire the weath advisor. They can take between 1-2% off the top every year.
• If you can't invest in stocks (or bonds) ... use ETFs. I found this book to be very helpful: The ETF Book: All You Need to Know About Exchange-Traded Funds
• We have all of our investments at Wells Fargo. (our "clearing broker") (point 3 above)
• Read, read read about investing. Money magazine is very helpful. As is the Wall Street Journal and Yahoo Finance
• Diversify, diversify, diversify!
• Don't get emotionally attached to your investments (although we did buy MMM because our daughter works there!
• Regularly invest and save. We started way too late (20 years ago). Start early!