The Motley Fool Money Guide
Published by The Motley Fool, Inc., 123 North Pitt Street,Alexandria, Virginia, 22314, USAFirst Printing, February 200110 9 8 7 6 5 4 3 2 1This publication contains the opinions and ideas of its authors and is designed to provide usefulinformation in regard to the subject matter covered. It is sold with the understanding that theauthor and publisher are not engaged in rendering legal, financial, tax preparation, or other pro-fessional services. Laws vary from state to state, and if the reader requires expert assistance orlegal advice, a competent professional should be consulted. Readers should not rely on this (orany other) publication for financial guidance, but should do their own homework and make theirdecisions. The author and publisher reserve the right to be stupid, wrong, or even foolish (witha small “f”). Remember, past results are not necessarily an indication of future performance.The author and publisher specifically disclaim any responsibility for any liability, loss, or risk, per-sonal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and ap-plication of any of the contents of this book.Copyright © 2001 The Motley Fool, Inc. All rights reserved.The Motley Fool and the “Fool” logo are registered trademarks and “Fool” is a trademark ofThe Motley Fool, Inc. ISBN 1-892547-11-2Printed in the United States of AmericaBody set in Apollo MT 11.5/13.5. Questions set in Syntax Med 13/13.5. Titling set in ITC Veljovic.Without limiting the rights under copyright reserved above, no part of this publication may bereproduced or distributed in any form or by any means, or stored in a database or retrieval sys-tem, without the prior written permission of The Motley Fool, Inc.Distributed by Publishers Group WestCover design by Johnson DesignInterior Design & Production by Pneuma Books: Complete Publisher’s Services;(for info visit www.pneumadesign.com/books/info.htm)Printed by United Book Press, Inc. The Motley Fool’s mission is to educate, amuse, and enrich. Begun as anewsletter serving 60 readers in August 1994, the Fool now reaches mil-lions of people every month as it plays host to a celebrated community ofindividuals dedicated to helping each other achieve financial security andindependence. The Motley Fool’s products and services are available acrossa variety of media: on its website at Fool.com; via its four Simon & Schus-ter books, all New York Timesbestsellers; through its premium products,including online seminars, self-published books, and Motley Fool Research;through its syndicated weekly newspaper column, currently carried bymore than 200 newspapers around the U.S.; via its daily “Market Minutes”and weekly “Motley Fool Radio Show,” both joint ventures with Cox Radiothat can be heard on more than 150 stations nationwide; and on AmericaOnline (keyword: Fool). The Fool’s international website can be found atwww.Fool.co.uk and on America Online (keyword: FoolUK). Become a Fool!Join the millions of people who call themselves Fools and are taking controlof their financial destinies. When you become a Fool youÕll get:¥Access to The Motley FoolÕs informative and acclaimed website,Fool.com•A wide variety of personal finance solutions and exciting invest-ment ideas•Foolish product discount alerts •Answers to all of your questions about moneyGet started on your journey to financial independence today by register-ing at www.welcome.Fool.com!The Motley Fooliii Selena Maranjian is a senior writer at The Motley Fool. She lives in NewHampshire with her two dogs. (Whoops! Scratch that — that’s every otherwriter.) Armed with a Wharton MBA and a Masters in Teaching from BrownUniversity, one of Selena’s missions in life is to render the incomprehensi-ble comprehensible. She writes the Fool’s nationally syndicated weeklynewspaper feature and has also written Investment Clubs: How to Start andRun One the Motley Fool Wayand co-written The Motley Fool InvestmentTax Guide. Aboutthe Authoriv Few Foolish products are created alone. Foolishness is all about communi-ty — about people conversing and learning together, asking and answer-ing questions, sharing opinions, and making each other laugh. Even thoughI have an MBA, most of what I know about investing and personal financewas learned in Fooldom. Most of what you’ll read in this book also comesfrom Fooldom, directly or indirectly.I’m grateful to the many community members of the Fool who spend timeon our discussion boards, sharing their wisdom. I’m also indebted to mymany Fool colleagues, from whom I’ve learned much. I hesitate to name anynames, but when it comes to personal finance and tax issues, Roy Lewis andDave Braze are the ones who’ve most often made me look smart. Much ofthis book’s car buying and home buying information, as well as the glos-sary, is drawn from the work of Bill Barker, Paul Maghielse, and DavidWolpe. The colleagues who’ve taught me about investing are too numerousto name.Many Fools worked hard helping make this book a reality, heroically read-ing and reviewing every page and making it a much better work than itotherwise would have been. I thank them most sincerely: Brian Bauer, Reg-gie Santiago-Bobala, Alissa Territo, Robyn Gearey, and Debora Tidwell.Thanks to Alicia Abell as well, for her guidance as the book was shaped.Acknowledgmentsv For my family,who made me who I am,and my Fool colleagues,who always make me look good. FOREWORD by David Gardner viiiINTRODUCTION xiPART I — PERSONAL FINANCE 1Chapter 1: Saving and Budgeting 3Chapter 2: Credit Cards and Debt 13Chapter 3: Insurance 23Chapter 4: Buying a Car 45Chapter 5: Buying a Home 61Chapter 6: Paying for College 85Chapter 7: Banking Foolishly 95Chapter 8: Living Below Your Means 107Chapter 9: Taxes 121Chapter 10: Retirement 139Chapter 11: Divesting — Giving to Charity 151Chapter 12: Death, Funerals and Estate Planning 161PART II — INVESTING 175Chapter 13: The Basics 177Chapter 14: Wall Street’s Ways 209Chapter 15: Understanding Stocks 233Chapter 16: Researching and Evaluating Companies 251Chapter 17: Advanced Research Topics 299Chapter 18: Buying and Selling Stocks 309 Chapter 19: Mutual Funds 321Chapter 20: Managing Your Portfolio 335 Chapter 21: How Businesses and the Economy Work 351Chapter 22: Un-Foolish Investing 361Chapter 23: Potpourri 371PART III — APPENDICES 387Appendix A: Resources for More Information 389Appendix B: Glossary 393Appendix C: Index 403viiTableof Contents Every year, The Motley Fool executes its own April Fool’s Day prank. Wedesign each of the pranks in accordance with our public mission: to edu-cate, to amuse, and to enrich. That means the jokes themselves must notonly be funny, but must also teach people to make better financial decisions.Our 1998 joke provided a perfect example. On our home page at Fool.com,as evening blended into early morning on April 1, 1998, we put up a pub-lic apology, front and center. “We’ve been telling you for five years nowthat most mutual funds underperform the market averages,” it began. “Wewere wrong.”We were of course completely right. In case you didn’t already know, thevast majority (on the order of more than 80%) of managed stock mutualfunds have in fact lost to the market’s average over the past five years! It’sone of the most damning statistics out there — that mutual funds managedrather expensively by humans do worse, after fees, than the stock market’saverage performance each year. Given that you’re paying fees to a man-ager, do you not find it pretty shocking and disappointing to be payingsomeone to lose to the market for you? And not enough people know this,which is the educational purpose of our joke, once we came clean.Anyway, we claimed in this April Fool’s apology that we’d been wrong,wrong, wrong. You see, we had been misreading a graph, we said. For fiveyears, we had been looking at a graph of these numbers that had, unbe-knownst to us, been printed upside-down. So rather than 80% of all mu-tual funds losing to the market, our April Fool’s letter stated that 80% ofmutual funds had actually beaten the market. And we had been telling allour customers to steer clear of managed mutual funds as a bad idea! Eggall over our faces.Foreword byDavid Gardnerviii • The Motley Fool Money Guide Now if you’re not clear on what “stock mutual funds” are, or what “mar-ket averages” even means, these are irrelevant for the purpose of this Fore-word. I’ll just say now that you’ve come to the right book; Selena is here toteach you.No, the singular aim of this Foreword is to get across to you that if you don’t“know it all,” you’re not alone! In fact, you might be surprised to learn ofthe company you keep…Later that day, April 1, 1998, a vice president of a regional brokerage firmin Charlotte, NC who also hosts a popular regular radio broadcast in thatcity dispensing financial advice — castigated The Motley Fool for being sowrong about mutual funds. We’ll call him “Fanny.” In 10 minutes of radiowe will never forget, we listened to Fanny explain to his listeners how heknew we had always been wrong about mutual funds, that 80% of themhad beaten the market, that we were completely wrong and that our apol-ogy wasn’t even enough. “If I had my way,” Fanny said in an emotionallycharged address, “I’d put those guys up against a wall and shoot ‘em.”That’s right, a man who had risen to become VP at a regional brokerage firmand a daily radio personality dispensing financial advice to a large South-ern city had actually fallen for our joke.He had actually believed that 80% of all mutual funds were beating themarket! (He’d “known” we were wrong.) This Wise “expert” who heldsway over the money management of many did not himself even realizehow poorly managed mutual funds had performed. Given his career focus,you’d think he’d have had his eye on the ball, especially given his seniorlevel. You’d think so, wouldn’t you? Without ever intending to actuallybait professionals with our April Fool’s joke, we had snared a big shot whoactually lacked a simple knowledge of one of the financial world’s mostbasic truths.In her introduction, Selena calls it a secret that most of us don’t know muchabout personal finance and investing. Guess what? She writes: “Most ofyour friends, relatives, neighbors, and colleagues probably feel the sameway. Just as you’re pretending that your financial house is in order, soare they.”Foreword by David Gardner • ix In this handy, plainly worded, and humorous guide are many of the an-swers to questions most of us think everyone else butus already knows.Keep it nearby, go back to it as needed, and put these answers to work foryou in your daily life.And don’t believe a word you read on our site on April first. But you’ll besurprised who does!— David GardnerTo read the 1998 April Fool’s Joke visit: www.Fool.com/AprilFools98/x•The Motley Fool Money Guide [...]... nationwide; and on America Online (keyword: Fool) . The Fool s international website can be found at www .Fool. co.uk and on America Online (keyword: FoolUK). Become a Fool! Join the millions of people who call themselves Fools and are taking control of their financial destinies. When you become a Fool youÕll get: ¥Access to The Motley Fool s informative and acclaimed website, Fool. com •A wide variety of personal... spent percentage spent 7 8 • The Motley Fool Money Guide The Motley Fool s mission is to educate, amuse, and enrich. Begun as a newsletter serving 60 readers in August 1994, the Fool now reaches mil- lions of people every month as it plays host to a celebrated community of individuals dedicated to helping each other achieve financial security and independence. The Motley Fool s products and services... performance. The author and publisher specifically disclaim any responsibility for any liability, loss, or risk, per- sonal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and ap- plication of any of the contents of this book. Copyright © 2001 The Motley Fool, Inc. All rights reserved. The Motley Fool and the Fool logo are registered trademarks and Fool is a trademark... every other writer.) Armed with a Wharton MBA and a Masters in Teaching from Brown University, one of Selena’s missions in life is to render the incomprehensi- ble comprehensible. She writes the Fool s nationally syndicated weekly newspaper feature and has also written Investment Clubs: How to Start and Run One the Motley Fool Way and co-written The Motley Fool Investment Tax Guide . About the Author iv ... mo- torists fall into these categories.) Most policies offer a degree of cover- age in this area, but it might not be as much as you need or want. And finally, do some comparison-shopping! 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At www.ushc-online.org, the United Seniors Health Cooperative offers additional useful information. Here are several books recommended by the Fool s... in the mail. I already have a card and don’t want any more mail offering me new ones. How can I stop it? There are three main credit bureaus in the United States, and they’ve agreed that if someone contacts one of them and asks to be removed from junk mail (er, “direct mail”) lists and telemarketing phone lists, they’ll all honor the request. Call them at: 888-5-OPT-OUT. Here are the three and their... and Investments Other At The Motley Fool, one of our main goals is to get everyone on Earth investing and building a financially secure future. It’s a tall order, we know. Lots of people are not even close to the point where they are ready to begin investing, though. Instead, they need to focus on generating more money to in- vest. Enter the world of saving and budgeting. Why should I bother with budgeting? Most... things). The premium is the amount you pay to keep the policy in force. The deductible is the amount or portion that you will have to pay on any claim. For example, let’s say that you have a car insurance policy with a $250 deductible. If you have a small accident and the repair will cost $600, you’ll have to pay the first $250 of that, and your insurance policy should cover the rest. If you have another . of the use and ap-plication of any of the contents of this book.Copyright © 2001 The Motley Fool, Inc. All rights reserved .The Motley Fool and the Fool . andRun One the Motley Fool Wayand co-written The Motley Fool InvestmentTax Guide. Aboutthe Authoriv Few Foolish products are created alone. Foolishness