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How Wall Street Works And How To Protect Yourself

|Includes: Vanguard Total Stock Market ETF (VTI)

In one of his recent articles Wall Street Journal writer Jason Zweig, reports that an investor, Philip Eberlin reportedly put 80% of his assets in CDs and fixed annuities because:  “I don’t have trust in Wall Street to help the small investor in any way, shape or form.”

Who or what is this bad, ugly beast called “Wall Street?”  Does anyone really know how Wall Street works?  When we blame it for all financial woes, who are we blaming?  Goldman Sachs?  Warren Buffett (he owns alot of Goldman)?   Is Wall Street your life insurance company, credit card companies, mutual funds, brokers, banks, and investment banks?  All or some?

The fact is, none of us are sure and it doesn’t matter because we don’t have much power over this ominous Wall Street — whatever it is.  But there is a Wall Street that we, as individuals can prevent from damaging us.

Most financial institutions want to control our money, which in turn, gives them a unique opportunity to bill us through fees that we don’t see or worse, don’t understand.  Because we’re not writing checks for these fees, we tend not to pay attention as our money flows out of our pockets and into theirs.  And that’s where the trouble starts!

Put $25,000 into a mutual fund and you’re hiring a Wall Street stock picker and paying him around $400 per year.  He and his fund now control your money.  Hire a financial adviser or a broker to manage your account – there you go again!  Wall Street now controls your money.

But here’s where Mr. Eberlin has it wrong — its investing 101.  If I buy an ETF like VTI that holds thousands of US companies, I own a part of all of them – IBM, Coke, Disney and Microsoft.  There’s no Wall Street.  A broker may hold my security, but they’re not charging me to invest.  I own great businesses, and my distrust of Wall Street should have no bearing on my decision to do so.

Buying low cost ETFs according to a prudent asset allocation, takes Wall Street’s hand out of your pocket.  You’re in control of your own money.

Our friend John Spence writes about this remarkable breakthrough.  When you trade Schwab ETFs or now iShares ETFs at Fidelity – you pay no commissions.  This lowers the cost of implementing an all ETF portfolio that is periodically rebalanced.  Schwab and Fidelity will also manage your ETF portfolio for you for about .6%.  While not as good as our service and way more expensive, it validates our approach and educates investors.  Go Schwab and Fidelity!

Responsible journalists like John Waggoner of USA Today are helping investors learn which ETFs to stay away from. He has a great style for helping beginner investors understand risk and financial information.  He gives a balanced view of ETFs and how to know which ones to stay away from. 

Jason Zweig, is one of the most respected finance journalists in America.  In this article, he posits:  “For many investors, the market’s turbulence hasn’t just destroyed wealth. It has shattered their faith in the financial system itself.”

In the coming years, these trends will reduce Wall Street’s fees which will in turn, weaken its grip over Americans and their money.   I hope you’re riding these trends and not falling victim to them.

Disclosure: I own VTI