When I talk to people about investing, I see how easily they get overwhelmed. Can’t blame ’em. So let’s reduce it to a series of statements that are simple and true (in my opinion and experience), independent of one another, and see if that helps.

My suggestion is to read and absorb just one a day. That ought to last a while.

• All stocks, bonds, and mutual funds are securities. When one says ‘securities,’ one means all those, but excludes raw precious metals, commodities, real estate, Cabbage Patch Dolls, and stuff like that.
• An index, like the Dow or S&P 500 or NASDAQ, just watches a pool of securities and reduces it to a total number. It’s only as indicative as the chosen securities and the weight each receives.
• In all investing, percentage is key. Don’t look at the raw number change of the index, or the security. Look at percentage change. If you can’t divide using Windows Calculator, you can’t understand investing. Of course, if you can divide using Windows Calculator, you can understand investing.
• Stock splits mainly change looks and convenience. If a $500 stock splits ten for one, the fundamental valuation didn’t change. Everyone just got ten shares of $50 stock in return for one share of $500 stock. It’s about as significant as breaking a $20 bill into tens, fives, ones, whatever.
• A common stock represents a share of ownership of a company. On the fundamental level, it is buying a piece of a business.
• A bond represents borrowed money, with bondholders as debtholders. Your car loan or mortgage would be in effect a bond issued by you to your bank, if you only had to pay the monthly interest as you went and then had to fork over the principal at the end of the term. Since you have to cough up principal as you go, it’s not quite the same.
• A preferred stock is a hybrid of bond and stock (oversimplification for ease of understanding), but in my opinion is more like the bond part than the stock part.
• When we say ‘fixed income,’ we generally mean bonds, but preferred stocks fit the category as well.
• There are two main ways to make money: growth and income.
• In growth, you want to sell it later for more than you paid for it. In income, you want to get paid as you go along. Some go for one, some the other, some for a combination. I like getting paid as I go along, myself. Then it’s too late for them to back out on paying me.
• Conventional open-end mutual funds (most of the ones you hear about) apply 1975 logic and constraints to 2015 investing. Which was fine in 1975, less so today.
• Roth vs. traditional IRA: you are deciding whether you want to get the tax benefit now (traditional) or trust the government to give it to you later (Roth). Your call, and there are good arguments for both sides.
• Your employer’s 401k often limits your choices to crappy open-end conventional mutual funds. Not much you can do about it. It’s a great racket for fund administrators and fund companies, which is not to say it’s all bad for you. Rather, it’s not as good as if you were free to invest it as you chose.
• Most conventional open-end mutual funds don’t beat their target market indices, so it raises the question of why keep paying them 1-2% per year when you can, in effect and with ease, buy the performance of the index and pay the index fund manager about 0.2%.
• Buying a precious metal fund or mining company stock is not the same as buying the metal, and the two shouldn’t be confused.
• Looking at interest/dividend yields, here’s the simple math: divide the total annual money they pay you per share by the price you paid for the share. Payout$ / price$ = yield%. If they pay you $5 per year for a share that cost you $100, you are getting 5%. If the share went up to $150, you are still getting 5%, provided the dollars paid you per year do not change.
• A full-commission broker is only as good as his or her thinking, and has to outperform by the commission amount just to break even for you. Worse: the broker generally has a vested interest in trading. Buy-and-hold makes him/her no money, unless it’s an unlimited free trades setup, in which case you’ll pay about what you’d pay a conventional mutual fund manager.
• The Dow Jones Industrial Average is worse than worthless. Why? Because if you take two stocks of companies of the same overall value, one priced at $10 and one priced at $100, and each change by $1 in a given day, for the first it’s 10% (a huge day) and for the second it’s 1% (a typical day). Yet both have equal impact on the Dow. You would be better off if you strove never to even learn what the Dow does.
• You don’t know how good your investing nerves are until you watch the whole market go to hell one day. What you do, or do not, when that happens for weeks, is your answer.
• Bond funds are not the same as bonds, any more than gold stocks are the same as gold.
• Bonds don’t have a market like the NYSE or NASDAQ. They’re bought and sold from inventories. As such, bond indexes can’t perfectly imitate their markets; they can only try very hard for representative samples.
• Bonds die. Stocks don’t. In ten years, a ten-year bond goes away, with its principal paid out in redemption, and it no longer exists to buy or sell. IBM stock, in some form, has existed for nearly a century.
• The bond your school wants you to approve involves them getting a loan from investors, with you agreeing to pay the investors the interest, and in time, reimburse the investors for the principal. So investing is part of your world if you pay rent, because your rent covers the property taxes, and that’s where school bond taxes are paid.
• It’s unrealistic to expect gains every year. The realistic comparison is to the relevant indices: did your total return % (growth plus income) exceed them? Match them? Underperform them? If the indices took a 20% dump, and you only took 15%, good job, well done. If the indices climbed 30%, and you only got 20%, you took a bath. Terrible year.
• The market is full of euphemisms. One is ‘correction.’ A correction means that the market took a big dump. It sounds so much better in print than ‘big dump,’ more dignified, but money is money.
• Feel free to engage in ethical investing, long as you accept that you have reduced the focus on making money. And remember this: the total amount of stock doesn’t change because you refuse to own Monsatan (poisons), Wal-Mart (first world exploitation), Nike (third world exploitation), Reynolds (tobacco), or Exxon (fossil fuels), or Diageo (alcohol). To sell it, someone has to buy it. If you really want to annoy the company, buy their stock, donate the dividends to causes that hassle the company, and vote against management’s recommendations in shareholder elections.
• Read too much investment media, and it’s like politics or football: you can find articles to confirm any perception. Want to believe next year is crash year? There’s a guy at Marketwatch who predicts crashes every year. About once a decade, he’s right. No one calls him out on the other nine years.
• If you get your market information from Jim Cramer, that’s like getting your history information from the History Channel, or your understanding of basketball from the Globetrotters, or your science information from a religious scripture. As in all media, do not confuse financial news with financial news entertainment.
• If you hand your money to a financial planner, find out how s/he gets paid. With every investment: find out who gets paid, and what. No one’s doing any of this free. Two things are true: 1) everyone is getting paid, and 2) you are paying them, somehow, somewhere. It’s okay to pay, but stupid not to know what/who/when you pay.
• I keep using the long phrase ‘conventional open-end mutual funds’ not to be cumbersome, but because there are a number of mutual funds that are neither conventional nor open-ended, which I want to exclude from the statement.
• For equities (securities representing ownership rather than debt), we identify them by a ‘ticker’ of one to five letters (AT&T is T, Microsoft is MSFT, Fidelity Magellan Fund is FMAGX). Five letters ending in X is a conventional open-end mutual fund. Five ending in Q is usually a company in bankruptcy, delisted from the major exchanges. Five ending in Y is a foreign stock’s American shares, without getting too complicated. Five ending in F is a foreign stock.
• Note that there is no way to tell exchange-traded mutual funds, real estate investment trusts, closed-end mutual funds, and many other pooled investment shares from common stocks by looking at the ticker symbol. Note also that not all foreign stocks have an F or Y at the end, or five letters. Toyota is TM.
• Any dividend that looks too enormous is soon to be cut or eliminated. Simple.
• When you see lots of people around you doing a stupid thing financially, brace for impact. Security guards bragging in the elevator of your skyscraper about big returns? Venture capitalists throwing money at anyone with a domain name and a tattoo? Banks lending money to people who can’t pay it? Brace for impact.
• 95% of Americans should just buy index ETFs and sit on them, rebalancing every year or two. That works unless you forecast an apocalypse that destroys the value of the US dollar and economy.
• If you forecast an apocalypse, not even your mattress is safe. If you really believe it, you should emigrate to someplace you do not forecast will face an apocalypse, because even if your doomsday doesn’t kill you, it will make your life suck.
• Investing is a great way to find out what people really believe, as distinguished from what they like to say and think they believe. Show me someone who thinks it’s all going to hell, and who’s putting money in a 401k, and I’ll show you someone who doesn’t believe his or her own words.
• Rebalancing is good. It means when you divide your investments among several things, and adhere to a percentage allocation by selling what you now have an excess of, and using it to buy what you have a shortage of.
• Yes, Wall Street is ripping us all off. Imagine if you were allowed to go to Vegas (or the local Native American casino), but if you lost big, got bailed out. You will not get to play by Wall Street rules, which are for very rich people. That, however, doesn’t mean you can’t make gains; they just will never match the gains guaranteed to those who own the system and operate it mostly for their own profit. That’s no reason not to get some gains of your own.
• If you think the investing public is smarter than you are, think on this. Money market mutual funds are basically savings accounts in most people’s eyes, but in reality they aren’t guaranteed. They maintain a share value of $1 a share, and that’s what you actually own in them: shares. In 2008 or so, a few MMFs ‘broke the buck’–had their share value slip below the $1 which everyone takes for gospel. It was cause for panic, and in panic times, people run for safe havens. Where did they rush to? The safe haven of…money market mutual funds! To get out of the burning building, they ran outside, then back into the building. That’s your competition. Still think they’re smarter?

Our system is greed-based, and the extent and style of your participation in it is a personal decision.