The Bold Truth about Investing

Introduction: The Ten Commandments of Investing I began my career in financial services more than seventeen years ago. With three generations of accountants already in my family, I seemed destined to become an accountant. My great-grandfather, the oldest child in his family, found his way to the Midwest in the early 1900s in need of a trade, so he became an accountant and established his business in Kansas City, Kansas. Interestingly, he worked from an office located on the same block where two brothers began a rival firm that later became the tax preparation giant H&R Block. Both of my grandfathers were CPAs, and my dad was a CPA and tax attorney. Yes, I truly seemed destined to become an accountant. But destiny doesn't always become reality. My accounting career got off to an early start. Beginning at age twelve, I spent summers at my grandfather's accounting practice, learning how to reconcile bank accounts and prepare payroll, income statements, and other vital records. So I learned from an early age the importance of understanding financial statements and financial issues. The work was tedious, but invaluable for my eventual livelihood. Not only did we prepare taxes for various companies, but we also prepared personal taxes for their owners and officers. I frequently saw that most people who actively traded stocks lost money. It was common to see a successful business owner lose 20 percent or more of his stock portfolio in a year. During this time I gained valuable insight into the reality of stock picking. I worked for my grandfather for several years after college and trained to be an accountant, because after all, an accounting career was my destiny. But again, destiny isn't always reality. One day in 1991, my grandfather decided he wasn't enjoying the daily grind as much as he once had. Although he had vowed to never retire, my grandfather decided that this was now the right choice after all and he offered me his business. My grandfather's retirement forced me to choose my direction. The truth was, I didn't enjoy the accounting business, reading columns of numbers every day. I politely declined the offer. So at age twenty-seven, married and expecting our first child, I went to work for Smith Barney. I chose this path because the world of investments had always intrigued me. I remembered those successful business owners who lost money in the stock market, but I also knew that money could be made in the markets. Both my father and grandfather were investors; it had been natural, when I was born, for them to gift me with stock, and investments and world events were common topics of discussion at the dinner table. Because I was exposed to discussions of financial investments and accounting principles from an early age, when I went to work for Smith Barney I believed I knew more about the markets than the average guy. But knowledge of the markets and knowledge of how to be a stockbroker are two different things. I quickly learned that I didn't know anything about being a stockbroker. During my new-hire training, I received a minimal amount of education on investments; the bulk of my training centered around selling. I quickly learned that the ability to "cold call" would be essential to my success as a broker. I suppose I had a knack for cold calling, because I soon became ranked among the top students in my class of sixty. I spent my days sitting in a cubicle with a headset, calling thousands of people to get a handful of clients. It wasn't easy, but I was doing well, very well, and earning a six-figure income. Over time, however, Smith Barney changed. After two company acquisitions, Smith Barney went from 2,500 brokers to 14,000 brokers. Up until that point, I could sit with a potential client and discuss financial needs and goals. Now Smith Barney began to tell us what to sell. When the Smith Barney XYZ Fund came out, I was expected to sell a certain amount of it. About this time, headhunters began calling, and I knew I needed to work for someone else  -- a company that hadn't been through these mergers and didn't do business this way. I moved on to Prudential Securities. At Prudential I gained an important insight. I discovered that I love helping people with their investments. I didn't want to sell people something that wasn't going to help them. I wanted people to understand their investments and why some were better suited for them than others. As time went by, I became better and better at helping people. In the brokerage industry I was selling load funds, because that was all we were allowed to sell. I didn't make as much money selling mutual funds as I did trading stock, but it dawned on me that over the long run, clients holding mutual funds earned a much better return  -- if they were decent funds  -- than did the clients who were buying and selling individual stocks. I was making a lot more money from the stock clients, but the clients in mutual funds were more successful in building their wealth. I needed to head in a new direction again. All at once, in the middle of the night in 1995, it came to me: I would provide advice on mutual funds for a fee basis instead of selling whatever I could get someone to buy on a transactional basis. I could build a business around selling mutual funds. As an independent investment adviser, with no ties to any company, I opened The Mutual Fund Store with the purpose of helping others build their wealth. You'd think this would be a commonsense approach. Amazingly, thirteen years after launching The Mutual Fund Store in 1996, in 2009 we remain the only national fee-based investment advisory organization operating in the vast segment of the market better known as middle America. Let me explain. Commission-based brokers represent the vast majority of the industry. They often focus on the smaller investors, those with $500,000 or less in their portfolio, and they're paid by the transaction, meaning they're paid up front regardless of whether the investment increases or decreases. A 5-percent commission is common. In contrast, a fee-based adviser is paid to manage the client's portfolio; typically the adviser gets the equivalent of 0.5 to 2 percent each year. The adviser's income rises or falls with the portfolio's performance; he has a financial incentive to increase his client's wealth. Unfortunately for most investors, fee-based advisers typically focus on the wealthier clients, those with at least $500,000 to invest. The Mutual Fund Store is different. We are unique in bringing fee-based investment management to the average American. That's one reason we expanded so quickly, and it doesn't hurt that the ranks of our target market continue to swell. I like to think that at least some of our success can also be attributed to the fact that we know how to talk in everyday language to our clients. Finances can be complex, confusing, and, to some people, downright boring. In my more than seventeen years in the financial services sector, one thing has become painfully clear to me: some folks simply don't relish the world of securities and high finance the way I do. Investment terms like expense ratios, liquidity, and net asset values make their eyes glaze. I have a little trick to spice up all this financial jargon so that retirement planning and other financial topics aren't as tedious. My communication weapon of choice: analogies. They make a fuzzy, abstract concept seem clear and concrete, reinforcing the power of the original idea. The other reason for our success happened when good fortune smiled from the airwaves. In 1998, Peter Newman, a CPA in the Kansas City market, invited me to be a guest on his radio show. We had some mutual clients, and he was impressed by our investment statements. I had never been on the radio before, but we hit it off. A month later he called me back. Eventually I was a regular on his show, even hosting while he was on vacation. Soon I landed my own radio broadcast on the same station. My business grew from $10 million under management in 1997 to $50 million by the end of 1998. The business and my radio show were doing really well, and we were able to grow both. Today The Mutual Fund Show is a nationally syndicated program airing coast to coast and still expanding to new markets. The broadcasts are sheer fun. I talk to interesting people and express my views  -- on everything from where the economy is headed to the scandals that rocked the mutual fund industry in the early years of the twenty-first century to the credit meltdown and resulting stock-market turbulence of 2008. The combination of offering carefully tailored advice to clients of The Mutual Fund Store and explaining sound investment principles to a mass audience via radio is my calling, my passion. Over the years, as I have guided clients on their investments through The Mutual Fund Store and studied investor behavior in my conversations with callers to The Mutual Fund Show, I have realized that I keep coming back to ten broad principles of investments. These principles can help guide the beginning investor as well as reinforce the best instincts of more savvy market players. There is no clearer, more compelling way of stressing the importance of these foundation principles than by presenting them as my Ten Commandments of Investing:   #1  -- Know Yourself    Self-knowledge will determine the success of your financial plan. Consider what stage you are at in your life and decide the goals you want to accomplish. #2  -- Know When to Invest    The time to invest is now. But first you'll need to take a few steps to get your financial house in order  -- like setting up a rainy-day fund and paying off debt. #3  -- Know Your Adviser    Before you hire a professional financial adviser to invest your money, ask candidates how they are compensated. Find out what their expertise is, and check their disciplinary and employment history. Then discuss how you will communicate and work together to meet your goals. #4    -- Have a Plan    To develop a financial plan, you need to establish your goals, diversify your investments, and keep an eye on volatility; you will also need to revisit the plan as your life circumstances change, and adjust it as appropriate. #5  -- Be in the Best Funds Possible    Mutual funds provide professional management and diversification. Our goal is to identify funds whose managers have been able to deliver consistently strong returns over extended periods of time. #6  -- Avoid Any Hidden Costs    It's smart to be price conscious. You shouldn't let fees alone drive your investment decisions, but you should pay close attention to mutual fund fees and capital gains distributions. #7  -- Don't Buy What You Don't Understand    If your financial investment purchase requires a lengthy contract, chances are you don't fully understand today  -- nor will you understand later  -- the financial product you are buying. #8  -- Be Proactive about managing Your Retirement Investments     Don't wait to plan for retirement. There are no loans, grants, or scholarships for retirement, so don't delay your retirement savings for the sake of other needs for which financial options are available. #9  -- Stick to Your Plan    Make sure your investment accounts maintain your chosen asset allocation and check them on a regular basis. If your circumstances or market conditions change, adjust your investments accordingly. But don't make emotional and rash decisions that may hurt your returns and prevent you from reaching your goals. #10  -- Live Well, For You Cannot Take It With You!    I'm not saying you should spend foolishly, but what's the point in saving money if you never spend it? None of us knows what will happen to us tomorrow, much less when we retire, so learn to enjoy some of your investments along the way. In the chapters that follow, I will explain each of the commandments and how to take control of your investments. If you have been listening to my show, the book will consolidate the advice you consistently hear. If you're just picking up this book, the ten commandments will give you a thorough introduction to my investment philosophy. My mission is to help you take responsibility for your investments and reach financial success. Every day, I am responsible to my wife and my children, my extended family, my staff, and the thousands of clients who rely on me to make good investment decisions for them. I am also responsible to the hundreds of thousands of listeners who aren't clients but still listen to my words to determine what to do with their money. With great responsibility comes even greater reward. I can't begin to describe the satisfaction I feel when clients say that through our investment advice they're putting their kids through college, retiring and managing to meet their personal needs, or purchasing a retirement home. Destiny seemed to hold an accounting career for me, but it turns out my true destiny was to help others invest wisely. The reality is, I love it. After 2008  -- one of the worst years in the history of the stock -market  -- my ten commandments are even more relevant and important to follow. Whether you're someone just getting started with investing or you're a more experienced investor who wants to learn how to pick the best mutual funds, this book holds invaluable knowledge to help you along the way.