- Bargaineering - http://www.bargaineering.com/articles -

Yahoo! Principle of Investing

In William Baldwin’s column in an old issue of Forbes, he writes a “fictitious” investment advice letter to his widow [3], he suggests two important rules for her. The first rule is to use fee only advisors, it’ll cost more up front but be cheaper in the long term and yield more independent advice. The second is a rule I thought was important, he called it the “Yahoo principle.” The Yahoo principle is simple “Buy things that trade in large volumes at prices you can see.”

The idea is that when you buy a stock or bond or ETF or mutual fund, you’re buying something that is liquid and whose price is well known. If you need to sell it, you can sell it without great difficulty. High volume stocks are easy to sell because there are plenty of buyers in the marketplace at any one time (low volume stocks are trickier). Plus, you can buy and sell stocks for just a few dollars.

With mutual funds, you may not trade as often (once a day) but you are guaranteed to be able to at the end of the day. You don’t have to worry about taking a haircut because you happen to find the very last buyer in the world at that very moment. Finally, you can buy and sell shares of a mutual fund for free (Vanguard funds in a Vanguard account, Fidelity funds in a Fidelity account). I have a Vanguard account because I know I can buy and sell shares of Vanguard funds for zero commission.

More to the point, the Yahoo principle warns against tricky financial products. Baldwin points to products with names like Guaranteed Lifetime Enhanced Income Portfolio IV, where there is no ticket, no way to buy and sell it unless it’s to the person who issues it, and “it would take a finance Ph.D. two weeks to find all the buried costs.” Obfuscation is the friend of the person selling that investment, not the one buying it.

I’m a fan of this rule, you?