It sometimes seems as if the wealthy simply appear into the world that way. Yes, some are born into money, but that isn’t the case across the board. Many of my wealthy clients have had to work their way up the scale — and to do so, they’ve had to adopt a different set of habits from most other people.

We can learn a lot from them, these among our ranks who had to create the wealth they now enjoy. More precisely, it’s the habits that got them to where they are that we need to focus on and learn from.

So, as I’ve watched clients go from one end of the scale to another, over the years, here are five habits I’ve seen them all carry…

1. Putting off today what you can have tomorrow
The wealthy usually carry a willingness to live beneath their means for as long as it takes to reach their financial goals. While their peers are showing a tendency toward embracing the good life at the first sign of prosperity, the would-be wealthy take a pass on all of that.

While others are saving 6-10% of their annual incomes — usually for retirement — people who want to be wealthy often save 20, 30, 40 or even 50% or more of their incomes.

Imagine how much money you’d have saved in 10 years if you saved half of your income during that time? The fact that no one ever sees this happen is one of the reasons that people believe that the wealthy some how “come into money.”

2. Spending well
The self-made wealthy learn early in life that you never pay full price. The combination of this habit with delayed gratification is a powerful force when it comes to growing wealth. Not only do you spend as little money as possible, but you buy at a discount when you do.

While most people are buying the most expensive house they can afford, the rich-in-progress buy beneath their means, and buy the cheapest house in the neighborhood to boot. They first ask themselves, “how much house can we truly afford right now?” The same is true of buying cars, if one wants to be rich someday, he buys a conservative car — and buys it used.

3. Fleeing from consumer debt
Debt represents a reduction of future cash flow and the wealthy will avoid it. By paying cash on the barrel, there are no strings attached to what you buy that might compromise your ability to continue saving money at a high rate.

Notice how the drive to save large amounts of money causes frugal spending habits, which then enable the ability to make purchases without using debt; the three habits combine to form a pattern that brings the aspiring rich to the point of great wealth earlier than an outsider might expect.

4. Seeking low risk/high yield investments
If you want to be rich, the first rule of investing is to not lose money! If you have a small amount of money to invest you might be tempted to put it all into high-risk growth stocks in the hope that a big run-up in value will make you rich. But if you have — or hope to have — a large portfolio to invest, you might not take that kind of risk. Your investments will be in assets that are unlikely to collapse in price, reasonably likely to grow in value over time, and able to provide a steady cash flow while you wait for them to grow.

For the rising rich, a perfect investment asset might be an undervalued (and therefore very likely to grow) blue chip stock (not likely to collapse) with a history of above-average dividend yields (steady cash flow). He doesn’t need for his investments to make him rich — he’s already on his way there, and just wants to further grow his wealth, steadily and predictably.

5. Proper career focus
My wealthiest clients have the ability to center on the most profitable ventures and to let go of nearly everything else. They often do this by delegating non-profitable activities to others or maybe even to make them somehow go away.

This is easier to do when you have money to pay others to handle them for you, or when your finances are relatively uncomplicated. If, for example, the rich person has a business, he might pay someone to handle specific aspects of the operation that are necessary but produce little or no revenue. That frees him to concentrate all of his efforts on generating more income for his business. As a result, his business and his income grow much more quickly, making him wealthier still.

One thing I’ve seen in my clients with means: Becoming wealthy’s really a lifestyle as much as anything else. Once you adopt it — by living beneath your means, staying out of debt, and saving large amounts of money constantly, you have capital to invest (conservatively) and to pay others to free you up to make even more money. It’s not so hard to see why the wealth of the self-made rich seems to spring out one day as if there’s a winning lottery ticket in the mix.

But that’s simply not the case, and my self-made wealthy clients know this.

Financial Planners Virginia
Financial Advisor Richmond
Financial Planner Richmond

Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value of well over $500,000.00! So, despite the fact that it seems like an easy decision, you need to consider all your Social Security options carefully to avoid making a costly mistake.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have been piled onto it, and have thereby added to the complexity. So to make the best decision about how to file for it, you’ll need to consider four things: 1) health 2) income before retirement and 3) income during retirement and 4) taxes.

Retirees cannot rely on conventional wisdom! Simplistic “rules” such as “Always file for early benefits” or “You need to stop working to receive benefits” are NOT always true. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

At least four methods are used when electing how to take Social Security. And if you’re married, the two of you can mix and match these in more than 16 different ways (!). Each choice results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will offer you the best maximum value.

So these methods differ significantly… they depend on your historical earnings, marital or divorce status, continued work in retirement, life-longevity and rates of return. The choice alone could be worth $250,000 of income or more. Filing options include “early filing,” “standard filing,” “delayed filing,” “file and suspend,” and many combinations of these options for married couples. It is DEFINITELY worth careful study and analysis of each option… yet a majority of Americans make their choice impulsively and emotionally.

The decision is even more crucial for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus, planning for retirement is usually much easier for men (who statistically tend to have more assets and die younger). Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared with just 5% for retired couples.

So couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that a husband’s benefits are often higher and the wife’s life expectancy longer, each case needs to be analyzed carefully.

Unfortunately, many people file after considering only one or two options in isolation. Even worse–the Social Security Administration’s new online filing system enables quick decision-making. People can easily submit their request without any professional advice or planning.

Before filing, then, you obviously should be informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of “Retirement Benefits” (Publication No. 05-10035) online.

Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well-off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.

There’s obviously a lot to consider here. I recommend you sit down with somebody you trust that can walk you through your different options. It could make a BIG difference in your lifestyle!

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Long-time renters often cite all the negatives of home ownership, and there are some to be sure. But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:

Current Conception #1: It’s More Expensive to Own Than to Rent — This is probably the biggest myth out there that many proponents of renting continue to propagate. Primarily, at this point in time, with home prices having crashed and interest rates at record lows, the rent-to-buy ratio is favoring “buy” in many parts of the country, more so than at any point in recent history.

Now this isn’t just a rah-rah “buy a home” Note, and I would concede that it is entirely plausible that home prices continue to decline for several more years. But if you’re not buying to sell, but rather buying to live, it can be MUCH more economically efficient to own over rent, especially at this time.

Here is the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm

Let me repeat: It is becoming cheaper to own and it is becoming more expensive to rent.

In my analysis, this trend will continue for years.

Why? First off, the Fed’s policy has been to reward debt holders and punish savers with the unprecedented a) zero interest rate policy and b) projecting out through 2013 that rates will stay low. This in turn, is pushing up gold prices and equities prices, and investors are pricing in future inflation. This bodes well for landlords, and poorly for renters. See, this interest rate/inflation phenomena mixed with the new ratio of renters over owners is flooding the market with renters and starving the market for buyers. This makes homes more affordable, while landlords are embarking on higher annual rent increases.

Current Conception #2: Homeowners Have to Pay to Maintain a Home Instead of the Landlord. Put aside the premium you might pay if you got in a bidding war over a home or made some upgrades to your home that weren’t necessary. Simply baseline the same property and look at renting versus owning it. Everything you pay for as a homeowner, the landlord has to pay for as well. Who do you think pays for that? Do you think the landlord pays for snow removal, replacing carpets, fixing leaks and a new roof every 15 years out of the goodness of their heart? No — you pay for it! It’s all priced in over long-term rent trends. Landlords are in this business to make money and if they weren’t making money they wouldn’t be landlords. You are paying to put their kids through college and for their Caribbean vacations.

Basic economics dictate that over a long period of time, you are losing money by renting, not just because you’re not building any equity, getting a mortgage tax deduction, etc., but because you are paying for the upkeep, depreciation expense and maintenance of the home in your rent — PLUS a tidy profit to the landlord.

Many renters are convinced they’re “beating the system” because they don’t have to pay for these things, but they are — it’s just not itemized out in tidy fashion for them. It’s all in the rent. This is logic — and reality.

Current Conception #3: Renting Provides for Much More Flexibility to Move. This is a major (and legitimate) reason NOT to own. After all, closing costs, transfer taxes, realtor fees and such are nothing to sneeze at. However, what a lot of renters end up doing is deciding to rent instead of own, but then they never move! They end up renting for years on end when they could have owned.

And that flexibility? Well, the landlord also has the flexibility to keep increasing prices year over year at whatever rate they so choose — which then requires a calculus on your end as to how much of an increase makes it worth moving out, in order to just rent somewhere else. Additionally, you’re often locked into an annual lease (which isn’t very flexible), they can sell the home or put new tenants in each lease cycle (which isn’t very flexible), and you can’t do many things to the place you live in without their permission, or perhaps not at all (not very flexible). So, you’re trading the slight mobility flexibility for a lack of flexibility in virtually everything else that the landlord controls.

To reiterate, if you’re a current renter, you may feel this Note is critical of your situation. It’s not. It’s an economic reality that many Americans never have had, or never will have the economic means to be a homeowner. This is a mathematical certainty. The point here is to get my clients and friends thinking who DO have the means to save for a down payment, and who may be better off financially as owners than renters… but who continue to muddle along in complacency because they’ve convinced themselves that homeowners get hosed and renters have all the perks.

If you’re especially interested in math, here’s a helpful exercise for you to consider.
http://www.khanacademy.org/video/renting-vs–buying-a-home?playlist=Finance

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

What a messy weekend. Heartbreaking news from Afghanistan, the S&P downgrade — and now all of the resultant (and gruesomely predictable) political posturing. Oh, and as I write this, it’s no surprise that the stock market is “reacting” a bit.

Tom’s Key Reminder #1: The only thing certain about the stock market is that it’s volatile. So those of you with many assets resting there, don’t make moves out of panic. Sit down to discuss a tax-advantaged strategy … not a knee-jerk fear response.

Tom’s Key Reminder #2: What you choose to “ingest” over these next few days will greatly impact your state-of-mind. Garbage in, garbage out, as they say. And, of course, the opposite is true–when you surround yourself with excellence and clear-eyed determination, you find that your heart and mind carry much greater strength. Temper your media intake this week, as they are (quite literally) merchants of fear.

Tom’s Key Reminder #3: The only thing you can truly control is yourself. You can’t control the market, you can’t control the US debt rating (unless, of course, Messrs. Geithner and Bernanke are reading this — perhaps you guys can!), and there’s a real sense in which you can’t even, really, control your salary and income.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Billionaires aren’t hatched overnight.

But there will be another generation of such men and women in the next few decades — and chances are, they will tread the same path as those who have come before.

So let’s look at Warren Buffett’s path as an example, shall we?

1) Start with a meat and potatoes small business — and be your own boss.
Buffett made his fortune by doing things his way, not by following the crowd. In high school, Buffett and a pal bought a pinball machine to put inside a barbershop. With the money they earned, they bought more machines until they had eight different shops running their machines. When they sold the venture, Buffett used the proceeds to buy stock and start another small business. By age 26, he’d become his own boss and amassed $174,000 — or $1.4 million in today’s money.

LESSON: Don’t fall for the temptations of a huge, immediate windfall business. Cut your teeth on the side, with something basic, reliable and small.

2) Mind the foxes who steal from the vineyard: small expenses.
In the famous book, The Millionaire Next Door, authors Stanley and Danko report that millionaires live well below their means. They budget, plan investments, and allocate their time, energy, and money into building wealth instead of displaying high social status.

Warren Buffett’s companies are known for watching out for small expenses. Exercising vigilance over every expense can make your profits and your paycheck go much further.

LESSON: The next time you spot a sale or online deal, check in with yourself to see if that $50 is better saved or invested than spent. It might seem like you’re spending a relatively small amount of money, but it all adds up.

3) Debt kills.
Warren Buffett advises his people to limit what they borrow. Living on credit cards and loans won’t make you rich. Buffett never borrowed a significant amount of money, not even for investments or mortgages.

The Millionaire Next Door reports that millionaires’ parents did not provide “economic outpatient care”, and their own adult children are economically self-sufficient as well.

LESSON: If you do give your teenager a credit card, make sure to set firm limits and specify use ahead of time. If they abuse the privilege, they lose the card. Do the same for yourself.

4) Leap forward.
Very often those who supply the affluent become wealthy themselves. In fact, one of the best ways to make money is to sell products or services to those who already have money. Many people don’t see these opportunities because they’re far too busy seeking money and security in the short term only.

Well, when Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. But he didn’t allow others’ opinions to keep him from leaping into a profitable venture. Over and above, I might add, others with greater private means.

Lastly, I will suggest this: Get professional advice on new ventures and ideas. We are here for far more than “just” tax planning. I and my team would love the opportunity to sit with you, and help you evaluate the direction of your financial life … and point you in a new direction, should it be necessary.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Yes, it may be a cliche, but the greatest engine to generate real wealth is saving and investing. And the best way to ensure that your default is saving & investing is to automate the process. Pay yourself first, and your savings will grow exponentially.

Effective money management is based on the idea that very small changes can yield enormous gains in your family’s finances. This process, both easy and simple, is worth millions. Unfortunately, only a tiny percentage of American families take advantage of the tools available to implement this automated technique.

So here’s how you pull this off: Have all income flow into a joint taxable investment account. Make saving and investing your default. Putting all of your money in this account helps ensure that you move only the money intended for some other purpose into a different account.

For working families, this means an automatic deposit of paychecks into their joint account. Banks will try to entice you into setting up automatic payroll deposit into their checking account. They will offer you additional interest if you do so. Resist. The additional interest is not worth the failure to not only save but to save and invest. Your taxable investment account should be the default.

For retired families, this means an automatic deposit of Social Security checks. It also means their required minimum distributions (RMDs) from their individual retirement accounts (IRAs) should be deposited first into this account.

From this account you can then withdraw what you need for daily expenses. Do this by setting up a regular transfer of funds from your joint investment account to your checking account. Make sure the transfer matches the amount you have allocated in your budget, ideally 65% or less of what you need to support your lifestyle. The other 35% should remain in your joint taxable account, much of it to be invested.

Part of what remains is the 10% you have designated for “unknown unknowns”. In the ideal world, this money will not be needed, but few families can anticipate every possible expense. Each stage of life presents new challenges. Having the financial margin to absorb some of life’s shocks is simple wisdom and offers financial peace of mind.

Because the time horizon for this emergency money is unknown, invest it in a balanced portfolio. If unused, your emergency money will double in 7 to 10 years and provide a greater safety net for your family. If you have to dip into this fund, keep track of the amount. If it approaches the full 10% every year, you are using your emergency money to extend your budget, not simply for unanticipated expenses.

The less you use this account, the more quickly you will reach financial independence. These funds are mixed with your other taxable investment savings and continue to grow your net worth. If you are meeting all of your expenses without any major surprises, these funds can be used to purchase a home, start a business or for additional charitable giving.

Another portion of what remains in your taxable investment account will be the 5% you are specifically designating as taxable savings. Because this 5% gets mixed in with charitable giving that is being invested and your unknown expenses, the entire portfolio should be balanced. If an emergency arises, any portion of the portfolio could be sold to furnish the needed funds. Similarly, when you want to gift appreciated stock, any portion of the portfolio could be gifted.

The last portion might be the 10% for funding your retirement accounts each year. Many people put this money directly into a retirement account as part of the payroll process through a pretax deduction. If that is the situation, you don’t need to flow anything through your taxable investment account. But you may want or need to fund your retirement outside of a payroll deduction. One example is funding your Roth IRA each year. In this case you may want to collect the money in your taxable investment account and then transfer it to a Roth account.

If you want to fund a Roth IRA account for the maximum $5,000 (in TY2011), you could transfer the entire amount once during the year or set up a monthly transfer of $416.66. The money from your paycheck would provide the cash, either letting it build up throughout the year or supply the funds for each month’s transfer.

Busy people forget to make the necessary transfers each year. That’s why a monthly transfer is preferable. Saving and investing should be automated so it occurs regularly without any additional effort. Whatever is in your checking account you are likely to spend. Whatever is in your investments you are less likely to spend.

Automating the process of saving and investing is like damming a river to form a reservoir. The alternative is the manual process of hauling buckets of water from your stream to a water tower. You will never grow rich by hauling buckets, and it’s much harder work.

No matter what income you have, you probably already have enough to grow rich! Saving and investing just $10 a day builds a million dollars over your working career at average market returns. You build wealth by what you save and invest, not by what you spend. Automating the process of saving and investing grows your wealth while you sleep.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Well, now the holidays are truly behind us, and this is the week where reality sets in for everybody.

No more extended family (which might be a relief?), no more parties, no more presents. Just …daily life. And, in my opinion, this week is actually crucial to how the rest of your year goes. Why?

Because intentions and actions matter. No, I don’t subscribe to a mystical “universal” law of attraction–but I DO believe that how we act out what we intend sets a sub-conscious belief system in place which can have an impact for months at a time.

So … are you making resolutions? In some ways, this whole ritual of “resolution-making” can become very cliche, but look–we all need little “nudges” to help us actually make changes in our lives. I see it as my role in your life to not only provide authoritative and actionable advice for your financial situation, but also to play the role as “coach” for your particular situation.

This is why our clients and their friends seek us out for *more* than simple financial advice, but a whole host of other services as well–from planning, to business services, to simple encouragement. I get to be someone in your life who says: “You can do this. You’re not alone.”

It’s my great hope that our relationship will continue to grow into 2011, and beyond. And not just for “business purposes”. We love our clients … you’re a family to us! I should say I mean that in the *positive* sense…we all might be a bit “familied-out” right about now!

So, with my coach hat firmly in place, here are some thoughts for effectively creating and pursuing your personal financial goals, as we move into 2011…

Thomas Marshall’s
“Real World” Personal Strategy
New Year, New Financial Goals

Not to make you feel guilty, but for every seven years you delay saving and investing for the future, you cut in half the income you would enjoy at the end of your life. So, let’s make 2011 the year we get on the right financial course, shall we?

Here are some suggestions to get started…

1) Set Realistic Goals First, ask the right questions and stay the course until you’ve found the answers. Goals that are shared are ten times more likely to be acted on. Don’t wait until you have everything set up to seek out accountability.

2) Make those goals concrete and then document them. Set your savings goals as a specific annual percentage of your adjusted gross income (AGI). It’s a great idea to save at least 10% of your AGI in tax-deferred retirement accounts and another 5% toward retirement in taxable investments. If you are behind on your savings, you may want to save even more in order to catch up.

Third, craft the best strategy to implement your goals, including prioritizing the appropriate retirement vehicles. Start by investing just enough to get the entire match from a company’s 401(k) plan (if you have one) and then fund your Roth IRA accounts next. After these two, make certain you have enough non-retirement savings.

Fourth–and this is a BIG deal– automate your plan. Automating putting money in an employer-defined contribution plan is easy. Automating a taxable savings plan is just as painless. Most banks or brokers offer an automatic money link between an investment account and a checking account. They should also offer a monthly automatic transfer between the two accounts.

But I will say one last thing: the most critical component of wealth management in the new year will be tax minimization. With the potential for tax rates to fluctuate even more than the stock market in 2011, it’s never been more important to monitor what “Uncle Sam” is seeking to take from your wallet!

Financial Advisor Richmond
Financial Planner Richmond

The first decade of this century has not been kind to buy and hold investors. 2008 in particular was a devastating year for buy and hold investors. The S&P 500 Index declined 36.77%. The normal benefits of diversification disappeared as many non-correlated asset classes experienced large declines at the same time. Commodities, REITs, and foreign stocks all suffered losses of over 35%. So much for asset allocation and buy-and-hold.

However, there is a very simple system that the average investor can use with no-load mutual funds or ETFs (exchange traded funds) that significantly outperforms buy-and-hold a risk-adjusted basis. Thank Professor Jeremy Siegel and his book, Stocks for the Long Run, for the ability to keep your sanity in a very volatile economy.

In his book, Professor Siegel tested a system from 1886 to 2006 that bought the Dow Jones Industrial Average (DJIA) when it closed at least 1% above the 200-day moving average. He sold the DJIA when it closed at least 1% below the 200-day moving average. When not invested, he was safely in Treasury Bills.

The Result: He concludes that market timing improves the absolute and risk-adjusted returns over buying and holding the DJIA. When transaction costs are included (taxes, bid-ask spreads, and commissions), the risk-adjusted returns are still higher when employing market timing. Our research shows it is effective with all asset classes and funds in reducing risk

When applied to the Nasdaq Composite Index since 1972, the market timing system thoroughly outperforms buy-and hold, both on an absolute and risk-adjusted basis. Siegel finds that the timing model outperforms buy and hold by over 4% per year from 1972-2006 even when accounting for all costs, and with 25% less volatility. Unfortunately, Siegel does not report drawdown figures, which would have further demonstrated the superiority of the timing model.

So if you’re near retirement and unsure if you should be in the market (or asset class), this simple model can be used by nearly everyone (including in your 401k) to reduce risk. Remember, it’s not how much you make, but how much you keep. Yahoo! Finance has free tools that allows charting of funds and asset classes. Best of all you don’t need a stockbroker for this. Just slap a 200-day moving average on that investment.

The stock market’s stomach-churning swings are testing investors’ nerves once again. You may already feel shattered from the events of 2008-2009. Since the Greek debt crisis in the spring, turmoil has been back in the markets. At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? According to Brett Arends at the Wall Street Journal, here are 10 that need extra scrutiny.

1 “This is a good time to invest in the stock market.”

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that’s no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. “Certainly, sir — step this way!”

2 “Stocks on average make you about 10% a year.”

Stop right there. This is based on some past history — stretching back to the 1800s — and it’s full of holes. About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they’re expensive, you do a lot worse.

3 “Our economists are forecasting…”

Hold it. Ask your broker if the firm’s economist predicted the most recent recession — and if so, when. The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict “a slowdown, but not a recession.” That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 “Investing in the stock market lets you participate in the growth of the economy.”

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren’t as rare as you’ve been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 “If you want to earn higher returns, you have to take more risk.”

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, “risky” Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for “risk,” your broker probably thinks that’s “volatility,” which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 “The market’s really cheap right now. The P/E is only about 13.”

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That’s because earnings are so volatile — they’re elevated in a boom, and depressed in a bust. Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or “Tobin’s q,” which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market’s pretty expensive, not cheap.

7 “You can’t time the market.”

This hoary old chestnut keeps the clients fully invested. Certainly it’s a fool’s errand to try to catch the market’s twists and turns. But that doesn’t mean you have to suspend judgment about overall valuations. If you invest in shares when they’re cheap compared to cash flows and assets — typically this happens when everyone else is gloomy — you will usually do very well. If you invest when shares are very expensive — such as when everyone else is absurdly bullish — you will probably do badly.

8 “We recommend a diversified portfolio of mutual funds.”

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that’s good advice. But too many brokers mean mutual funds with different names and “styles” like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as “midcap blend.” These funds are typically 100% invested all the time, and all in stocks. In this global economy even “international” offers less diversification than it did, because everything’s getting tied together.

9 “This is a stock picker’s market.”

What? Every market seems to be defined as a “stock picker’s market,” yet for most people the lion’s share of investment returns — for good or ill — has typically come from the asset classes (see No. 8, above) they’ve chosen rather than the individual investments. And even if this does turn out to be a stock picker’s market, what makes you think your broker is the stock picker in question?

10 “Stocks outperform over the long term.”

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: “In the long run we are all dead.”

When investors consider mutual funds, they often hear warnings about the impact of fees and expenses on returns. But these seem invisible to investors, so what really is the impact?

A mutual fund’s fees and expenses may be more important than an investor might realize. Ads, rankings and ratings will often emphasize how well a fund has performed in the past. But according to the Securities and Exchange Commission (SEC), studies show that the future often is different. Fees and expenses can be a reliable predictor of mutual fund performance.

When considering a mutual fund, one of the most important numbers is the expense ratio, which tells you how much the fund costs. The ratio shows how much of the fund’s assets are paid to the portfolio manager and for other operating expenses. Typically, a fund pays an average of 1.5 percent of assets annually.

Three things typically figure into this ratio. The investment advisory fee pays the managers of the fund, which accounts for .50 to 1 percent. Then, administrative costs cover services such as record keeping, mailing and maintaining a customer service line, which can range from .20 to .40 percent. And often a fund will charge a 12b-1 distribution fee, which covers marketing, advertising and distribution services. This ranges from .25 percent to 1 percent of assets.

The upper range of these fees shows how high an expense ratio can be. And even though the fee seems to be just a few percentage points, it is charged in down years, when it can represent a significant slice of the return. Also, over time, the fee can cut the ultimate return by nearly 50 percent, according to one analysis. With an initial $10,000 invested after 30 years of 10 percent returns (a bit optimistic, perhaps), the fund has made $174,494, but with a 2.5 percent expense ratio, it has lost $86,944, according to an analysis by Moolanomy.com.

But even that isn’t the bottom line. There are still transaction fees incurred by the buying and selling of assets in the fund that go unreported, and that can double or triple the cost, according to Richard Kopcke of the Center for Retirement Research at Boston College.

Of the 100 largest stock funds held in defined contribution plans as of December 2007, trading costs averaged from 0.11 percent of assets annually in the quintile with the lowest costs to 1.99 percent of assets in the quintile with the highest costs, with a median of 0.66 percent, Kopcke found. But it is difficult for average investors to determine this percentage, he said.

The SEC has not been able to develop ways to report this percentage in the same way an expense ratio is reported, partly because fund managers say the number is too difficult to determine. One way to get an indication of the percentage is the fund’s turnover. The percentage of turnover shows at what rate stocks in the fund have been replaced. A high turnover rate would mean more fees.

The SEC last year required fund managers to disclose one year of turnover at the front of a prospectus in addition to the already required five years of turnover disclosed in the financial highlights section, according to a March 1 Wall Street Journal article. Turnover of more than 100 percent can indicate trading costs may be high, the Journal reported.