by Archie M. Richards, Jr., CFP^®
June 28, 2004

Studies show that more than 70 percent of Americans believe they're above average. This may be why investors tend to buy and sell stocks too frequently. They expect the trading to enhance their returns, but it does no such thing.

As a trader, you have plenty of competition. About 1 million professional money managers and traders and 95 million individual investors are trying to beat the same fickle market you are. To outdo them consistently in the short term, you have to know more than most of them put together - a tall order.

When stocks perform well, many investors think it's because they're sharp. But when the stocks perform poorly, oh no, it's because the broker pulled a boner or the economy had problems or the market went down. It's not their fault, They're above average.

Don't fall prey to such nonsense. The more investment decisions you make, the more likely you'll lose. Hold individual stocks for at least 5 years. Hold a diversity of mutual funds for. . . well, forever. Let the market do the work. Give time for the people of the world to create wealth. Don't trade.

In a recent column, I said that when investors become emotional in expectation of a certain price trend, the trend is likely to reverse. Tim asks whether my advice applies to real estate. Since 1996, housing prices in Southern California have tripled, a trend some have identified as a buying frenzy. Tim has been waiting to buy a California home for over two years in hopes that the prices would fall. While he waited, the prices rose 60 percent.

Sorry about your experience, Tim. Two thoughts come to mind:

• The best time to buy is when unfavorable conditions are headline news. It doesn't help now, I realize, but this was certainly the case when Grey Davis was still governor.
• Don't consider your home as a financial investment. Its main purpose is to meet your emotional needs. If the value rises, fine, but that's gravy.

Most annuity buyers think they pay no commissions. Not so. If someone sells you a policy, he's getting paid, ultimately by you.

Typical annuities sold by brokers or insurance agents pay commissions of 5-to-7 percent. The insurance company imposes a charge against the annuity of approximately 1.2 percent a year. It's called "mortality & expense." About half of this repays the insurance company for the commission it paid up front to the salesman.

If you want your child to learn to spend money responsibly, provide an allowance. Be generous, to enable the child to save for the future. Make it possible for the kid to spend the money foolishly, so that he may learn for himself what's smart and what isn't.

If something is bought for the child that's selected by you - clothing, for instance - it should be paid for by you. Whatever the child pays for, she should be allowed to choose without help.

Don't require charitable giving; the kid will consider his allowance to be the net amount.

Don't tie an allowance to doing homework or getting good grades. Those are obligations, not jobs. Normal chores are obligations, too, although chores that are big or specialized or especially unpleasant should be paid for. If a child babysits for a sibling, pay some of the money to the sittees as well as the sitter. This will reduce resentment.

If a child wants a higher allowance, require that the reasons be submitted in writing. It's difficult to whine in writing.

Lawyers sued two auto insurers in Texas for rounding up premiums to the next higher dollar (as they were permitted to do by the Texas insurance department). But fearing disastrous penalties, the insurance companies settled for $100 million. The lawyer who filed the suit received $8 million. Policyholders received $5.50 each, and everyone's auto insurance bills went up.

This is just one example of America's most insidious "tax" - our tort system. It costs the nation more than $200 billion a year, mostly in higher consumer prices. The Class Action Fairness Act should cure the problem. Let your congressional representatives know they should pass it.