Trust Funds

So, gramps finally kicked it and now you're loaded? Did mommy come back from South America with a suitcase full of "baby powder?" That bank teller finally listened to daddy's squirt gun? They shorted Enron last year? Okay, here's what to do with your newfound wealth. First off, kick the free basing habit and listen up.

You don't want a savings account. You don't want a checking account. You want to have as little to do with your local bank as possible. Those crack monkeys don't know their malodorous meaty parts from a hole in the wall. What you really want, sweetie, is an asset management account.

Schwab, (or Waterhouse or eTrade or whichever silly little discount web-net operation you chose to do your investing dirty work) has them and your account with them should be set up so that when you sell any of your securities, the proceeds from the sale will be deposited automatically in an "asset management account" or "money market" account. These accounts behave just like regular checking accounts down at Washington Mutual, except they pay exorbitant amounts of interest; with no minimum balance, no limits on check writing, and no fees. They'll give you a checkbook and an ATM card that can be used just like your local bank's checkbooks or ATM card.

There is really no reason to have an account with a local bank except to deposit checks. You can even have your paycheck direct deposited into your money market account at your broker. You can have your car payments auto deducted from the money market account. You can use it exactly like a regular bank account. They only real difference is that you cannot deposit checks into the account. You'll have to visit your local bank monkey for that. Keep as little money in your local bank account as possible -- just enough to keep it open.

If you are taking possession of a trust fund, take the stocks or bonds or devils food cake certificates or whatever else the little slave chimp "manager" has used to "invest" your money and try to discern what the "cost basis" of each investment is. If, for example, your manager purchased Amazon.com stock at $10 per share in 1995, and now those shares are worth $18 each, your cost basis would be $10 per share. This is important because when you sell that stock in oh so profitable Amazon, you will have to pay taxes on your capital gains. In this case, $8 per share. Capital gains taxes are about 40% if you're manager has held the stock for less than one year, 20% over one year, and 18% if the investment was held for more than five years.

If any of the investments have lost money, you can sell them at the same time to offset any capital gains you may incur by selling profitable investments. If any of the investments have appreciated significantly in value, you may want to re-think selling them -- the tax burden could be very large.

Take the remaining money and invest it in index funds. As mentioned earlier, this is the best option for investors who don't want to spend the rest of their lives glued to a computer screen, and never want to see another idiot on CNN babling on about some random shitpile of a stock.

It is possible to beat the indexes, but only about 20% of money managers succeed in doing so each year. Your safest bet for the long haul is investing in the market as a whole.

Use the relatively new exchange traded funds, or ETFs to do your index fund investing. They are better than regular mutual funds because managers take lower fees and do not need to buy and sell shares whenever a new person buys or sells stock in the fund. This is good because whenever a fund manager sells stock and creates a capital gain, you are the one responsible for the taxes. Some fund managers "churn" their accounts, sometimes selling 80% of his holdings each year. This can create a huge tax problem for owners that is not reported in the fund performance numbers.

So, which ETFs do you pick? Choose ticker IVV to track large U.S companies (The S&P 500), IWM to track small U.S. companies (The Russell 2000 index), and EFA to track foreign stocks (The EAFE index -- Europe, Asia, Far East). These are the lowest cost options for tracking these indexes. For more options visit www.indexfunds.com

However, if you are going to be investing small amounts of money over time in these three categories, you would be better served to find no load, low fee mutual funds. This will be better for small investments because there are no commissions paid on each investment with the mutual fund. You must pay your broker to buy or sell ETFs.

Basically you want to split your money into three categories: Large U.S. stocks, Small U.S. stocks, and large foreign stocks. If you are young, you'll want to put pretty much all of your money into the market. The older you get, them more you'll want to put into bonds. If you are anything under 30, put it all into stocks.

The last key is to leave the money where it is! Don't be tempted to sell in a market downturn. Be prepared to leave the money there for at least 10 years, and be prepared to lose a lot of money - the market can fluctuate wildly over short periods, but in the long run, the market will go up. If you are going to have faith in anything, believe this. Just buy the ETFs and forget about the money. Take a look at how you are doing every 10 years and you'll feel all warm and happy inside.

If you are the type of person who loves to check how your investments are doing every day, or you become nervous if a stock is going down, set aside a little bit of your portfolio to invest in stocks of your choosing. Watch those stocks every day - but by all means, leave the money in the index funds. That is your ticket to wealthy retirement. Ideally, this money will be left invested in the market until you retire to live on your investment money, perhaps 30 years or so down the road.

Think about this: If your parents are 60 years old, and had invested just $1000 in the S&P 500 when they were 25, they'd have about $24 million today. Even with all the bumps along the way, they'd still be stinking rich. However, if they had sold in a downturn - and there were many downturns - they'd be flat out of luck....