The Ignorant Investor

Today's Wall Street Journal carried an article on the new tendency of companies to "freeze" their pensions to exclude new employees or workers under age 40.

This news isn't going to surprise anyone who has been employed at any time in the past 20 years. From the moment I started my first real job twenty years ago, the word 'pension' has never crossed any of my bosses lips. "401K"? Yes, I hear that one a lot. Some programs have been generous with matching funds, others less so. My current employer, for example, gives employers 10 cents for every dollar they put into the program. That's right. All of ten cents. As you can imagine, I'm not planning on retiring any time soon. Match that with the annual increasing part of the premium I pay for health insurance and plans to reduce social security by the time I retire, and I'm looking at what Alan Greenspan would call a 'slightly challenging retirement planning issue on the horizon." Or, in other words, the chance of genteel poverty in my elder years if I don't act now.

It's difficult not to feel grim in such circumstances. The general thrust of the past few years is this: you can't rely on corporate America to take care of retirees at a time when American capital is triumphant over American labor. Workers don't have the bargaining power they once did, and the speed with which the modern corporation can divest and restructure itself has made the pension an awkward detail which no deal-maker wants to deal with if possible. Self-reliance is being thrust upon us, whether we are ready for it or not.

So I've heard that the new rule of thumb should be to take 20% out of one's salary, including any 401K program, and invest it according to sound principles so that a comfortable retirement may be assured.

Granted, if I win the lottery, get a huge promotion, come into millions- maybe I'll change. But for now, a hopeful cautious savings scheme is what I'm going with.

For no other reason than I think I should have these written down someplace and this place is as good as any other, the following are the three basic rules of investing that should keep me and any other ignorant investor out of trouble when it comes to investing capital:

1) Take your pile 'o gold and make two piles out of it: one pile is for risking in the market, and the other pile is for keeping. Make sure the second pile is protected from erosion in purchasing power by inflation, which means investing in some kind of bond fund and then reinvesting the proceeds rather than spending them.

2) When you invest in equities, only buy a stock if you're pretty sure the company is going to see earnings growth over the next few years that is way above average for the rest of the market and is currently undervalued by everyone else in the market. Otherwise you may as well invest the money in an index fund. You'll save yourself the headache of worrying about why your stocks aren't doing better than average and have the comfort of knowing that no matter what happens, most people aren't doing any better than you are. You'll also keep transaction costs down, and those are the costs that typically reduce the benefits of above-average returns generated by investing in individual stocks.

3) Don't trust the advice of brokers, pundits or financial magazines. Even assuming they aren't trying to bilk investors, they don't have advance knowledge of what the markets will do. There are literally thousands of people who claim to know what the future direction of the market or a stock will be, and some of them will turn out to be right. However, it's impossible to know who these people are beforehand.

Surprisingly, I find #3 the toughest rule to follow. When your money is on the line, it's hard not to respond positively to someone who promises to save you from your ignorance. I say to myself, "They're smarter than me, they know more than me, other people trust their advice more than they would mine- why not listen?" Well, because no one can predict the future, that's why. The only reason to listen to any of these people is when they're telling you not to do something crazy or stupid.

There are probably some other good rules I should list, but they're not springing to mind at the moment. I'll update the list as time goes on.

I'm on an e-mail list with TheStreet.com, the financial website run by legendary trader Jim Cramer, and every trading day they send me a little newsletter called "Before the Bell" or some such thing that highlights some of the stories they're covering for that day's market.

Now I like Cramer. He's charismatic. He's confident. You watch his show on CNBC, you get the feeling that this guy knows trading inside out. But he's also a sharp businessman, and he knows his audience is filled with ignorant investors like me. So what do I see in today's e-mail message from the Street but this little ditty:

If you're not up 550% since Jan. 4 Something's wrong!
Register for our FREE ONLINE SEMINAR and learn the
following:
1) How to choose the appropriate stock
2) How to insure trades from loss
3) How to adjust any trade that goes against you
To see if you qualify, click here:

http://offer.thestreet.com/t/350811/2057563/1342/0/

Now consider that the professional manager at the top performing mutual fund in any given year attains maybe 100% return in a year (and usually its far lower than that). Now ask yourself what these guys at The Street could possible teach in this seminar that would allow a person like me to not just outdo said professional investor, but to outdo him by FIVE TIMES. Barring the use of black magic, it ain't gonna happen.

Note also that this ad comes from a reputable financial media outlet. Not a late-night infomercial. Not from a Nigerian e-mail address. That just shows that the purpose of all financial media is to make money for themselves using whichever methods they think will pay off. For them to make money, you have to give them some of yours, whether they deserve it or not.