Investing: What Not To Do

So, as I have mentioned, I am a definite newbie when it comes to investing, however, having spent a lot of time researching and learning over the last year, I've come to some definite conclusions as to what I should not do, when I begin investing in a couple of months.

1. Giving Up or Hiring Financial "Advisors": I have a friend at work who has $75K in his checking account and is too busy and/or clueless about what to do with that money so he just lets it sit there. Obviously for him, a financial advisor would be a step up from the status quo. For the rest of us, however, the high fees they charge (which is before any fees you also have to pay from mutual funds and investment products), make these "professionals" easily beaten by do-it-yourselvers with the patience, time, and willingness to learn about investment. I have no interest in paying someone 1% of my total assets every year to "manage my money," by failing to beat the S&P.

2. Fee-Heavy Investments: I similarly have no interest in investing in other fee-heavy investments: front or back loaded mutual funds, overly high expense ratioed mutual funds, insurance annuities, or overly expensive brokers to hold my hand while they overcharge me (cough cough Charles Schwab). The internet age means none of these products are needed.

3. Individual Bonds: I have no real time to learn about the complicated and subpar-performing bond market. Long-term Bonds are usually highly risky (though lesser returning than equities) while short-term bonds pay peanuts. To paraphrase Warren Buffett the only good day to invest in bonds is on a day that doesn't end in the letter "y." While I may invest in a few bond mutual funds (like an indexed fund) to hedge against a stock market downturn, I have no intention of overdoing it.

4. Investing Too Conservatively: The key to good investing is assessing risks and determining which paths present the best opportunity, given the risks, to achieve maximum rewards. Keeping a 12 month emergency fund or paying down your mortgage is not a reasonable assessment of the risks presented by investment. Passing up reasonably risky investments is a far too fearful strategy to achieve investment success, and is guaranteed only to lead to subpar returns and high opportunity costs.

5. Not Taking Advantage of Tax-Favored Investments- IRAs, 401Ks, etc.: These offer massive tax benefits, which work out to be free money (especially if you have an employer matched 401K), and turning them down is a huge mistake. My NYC friend, despite my advice that he do so, has failed to create & contribute to a Roth IRA. If he had done so for the last two years (contributed $8K) that $8K (assuming a 10% return) would have returned about $256K in 36 years (when he turned 62). If he is taxed at a 28% federal rate and a 6% state rate, then that Roth would have saved him around $87,040 in taxes.

Will the Internet Kill the Real Estate Agent? Let's Hope So

I bought a house a couple of months ago, and as part of that process I used a buyer's agent. My buyer's agent basically drove me around to various houses which I had selected, helped me draw up an offer and supervised the contract process. For all of this, she got 3% of the sales price of the home (around $12K for probably around 40 hours work or $300/hour).

Considering the main thing she did was taxi me around to homes and open them with her little key, this seems like an exorbitant waste of money, especially since my wife and I found the house that we bought at an open house, without our real estate agent even being there.

In addition to these jobs, she also 1) showed me a couple of houses which were completely outside of what my wife and I told her we were interested in - but, surprise! they were her listings (so she would have gotten a 6% commission if they sold) and 2) pressured myself and my wife into raising our offer price, preying on our fears that we would lose the house we really liked and 3) pressured my wife and I into using her mortgage officer and home inspector.

My experience does a good job of showing some of the problem with buyer's side real estate agents:
1) Their incentives are completely misaligned with the buyers interests. They make less money from getting a good deal for their clients on the price of the house. They make more money from trying to get their client's to accept one of their listings. They build up relationships with settlement companies, bank officers, home inspectors- who all tow their line and toss them business/commissions in return.
2) They make a ton of money for doing very little. There is nothing that a buyer's side real estate agent does that can't be replicated by more legwork from the buyers and by more legwork from the closing company and associated real estate lawyers. I basically paid $300 an hour for use of the real estate agent's key.
3) They have a racket set up in commissions to protect their ability to profit exorbitantly- If I didn't use a buyer's agent, I would still have to pay 6% of the house commissions- only it would wholly go to the seller's agent. This is ridiculous, and was the reason I used a real estate agent: there wasn't an easy way for me to recoup that 3% commission.

Fortunately for the consumer, the competition of the internet is beginning to offer alternatives which should break down this racket. Internet sites like hungryagents.com now compete to offer you the lowest commissions through recouping some of their 3% commissions back to the price of the house sale.

Once again the internet will revolutionize a business where a bunch of fatcats are getting paid a whole lot to do very little. Viva La Revolucion!