The 20 Immutable Laws of Personal Finance

Not while interest rates are zero to 1 percent.

Or, You're less knowledgeable than whoever sits on the opposite side of all investments. The only thing that can save you is your knowledge of that fact.

Two guys are watching a roulette wheel. Red comes up four times in a row. The first guy concludes, "Red is hot. I'm putting it all on red." The second guy says, "Black is due. I'm putting it all on black." The fair end to this story would be the wheel landing on 0 or 00, so they both lose.

In real life, the ending is equally grim: Both guys shuffle their chips around, making opposite bets until the casino's 5.26 percent advantage leaves them both poorer. In real life, that house edge is a commission or a transaction cost or a fee that eats away your principal (and your "winnings") in identical fashion. If something is a good idea, it is not because of what happened in the past. It is because you are making an informed bet on what is going to happen.

Apple provides a perfect example. Is it now a great investment because it has fallen so much? Or is it smart to sell because the market hates it? The smartest analysis is what you think Apple is worth based on its price right now. All investing is price versus value. Yesterday's price and value count for zero.

This is not to improve your results. In fact, if you do find that once-in-a-lifetime long shot that comes in, diversification will prevent you from taking full advantage. But diversification reminds you that it's usually fruitless to spend the energy trying to outperform professionals at their game. Consequently...

The '00s were brutal on U. S. stock markets-1.41 percent over ten years. But even including the worst collapse in both equity prices and the very markets themselves that occurred in 2007 and 2008, it's not even close. The last thirty years, from the beginning of the '80s through the end of 2010, the compound annualized return of the S&P 500 was 10.71 percent. Last twenty years, it was 9.14 percent. Last forty years, it was 10.14 percent. And it's my personal belief that the teens are going to be (continue to be, actually) a great decade for U.S. equities. With government policies that encourage-practically command-cash hoarding, and even the biggest innovators in the country forced to pay giant dividends or stoke the share price with buybacks, there's really nowhere else to go. The best investment an American can make when factoring both returns and quality of life (i.e., not trying to outperform professionals while paying ludicrous trading fees) is a low-cost, highly rated index fund of American equities.

You are a sucker in most investment markets. Unless you become a professional, you're an underdog to outperform them. Apply most of your time, effort, and money to your business or career, where you are the professional and the favorite.

I've grown obsessed with a concept introduced by Morningstar as it moves into the money-management business. You've probably heard of the investing concepts "alpha" and "beta," which are used to measure the riskiness of your portfolio and its performance variance from a like basket of investments. Suddenly, in 2012, there's gamma, which measures the benefits that can be taken simply by planning smartly. The results are unbelievable-as much as 28.8 percent in additional retirement income by observing optimal curves for five areas: asset allocation, withdrawal, annuities, tax efficiency, and liability protection. It is amazing to me that the most considered field of investing can still yield surprising results, but I've been studying the concept and its effects, and they're real. There's not space to go into it here, but consider every American you know who's over sixty. The ones who saved enough and prepared for retirement are going to live longer and more happily than the ones who did not.

Half of Americans carry a credit-card balance, and they're paying roughly 14 percent on it. Startlingly, a lot of that 50 percent are also saving for retirement, including many who stock their 401(k) or IRA money in fixed-income funds that are doing 5 percent. According to Morningstar, a guy who pays off his credit-card balance and then invests for retirement will increase his 401(k) at retirement by 14.1 percent. (The math changes here when considering retirement plans that include "free money" from an employer in the form of a 401(k) match, which brings about a sub rule: Always take free money, even when it hurts to do so.

Same: Don't have kids to save your marriage. Don't buy a house to save your marriage.

The interest is tax deductible, and for a thirty-year mortgage, most of your initial payments are interest. It could be a good investment if you choose wisely. And you can live in it and have your life more positively influenced by it than by any other possession.

Insurance is a hedge against a catastrophic event. Don't insure against minor expenses or expenses that might be sad and hard to think about but won't bankrupt you. Insurance means taking the other side of the bet with someone who knows the odds better than you and profits only to the extent of your ignorance. The only reasons to get insurance are a) if you are smarter than the people against whom you are betting, or b) if you can afford to pay a marginal cost against a catastrophic event, cost, or outcome.

Health insurance, term life insurance (whole or universal life is for suckers only), car insurance (only to the degree you need it by law and to which you need to protect your assets against catastrophe), homeowners insurance, flood insurance-those are the products you should consider. I go nuts when I see ads (mostly on Judge Joe Brown) for funeral insurance or (on The Price Is Right) for insurance against the death of a child or grandchild. Extended warranties, identity-theft protection, flight insurance at the airport? Please. Buy what you need for the reason you need it. Don't buy life insurance as an investment, unless you'd pay more for an oil change if the mechanic promised to invest the difference.

Find and avoid them unless you have no choice or you can make a reasoned assessment of what you are getting for your money. Many "great" investments could turn out to be not so great once you factor in transaction costs: frequent stock trading, real estate.

How much do you spend on vacations? Cars? Hobbies? Restaurants? Vices? I believe in spending. I don't want to count every nickel. And I've always believed that I can make more money-that's one ninth of the reason I'm writing this article. But taxes make it an uneven proposition-understand that if you are falling short by, say, $5,000 a year, you have only two choices: Spend $5,000 less. Or, depending on your tax bracket, earn about $6,500 more.

Tax avoidance usually ends badly. First, you likely have increased costs for accounting and legal advice. Second, at a minimum you have the cost of the stress while you sweat out long, loophole-filled statutes of limitations. (Remember, the same people imposing those taxes are the ones who decide the length of the statute of limitations.) Third, directing your fortune building through tax avoidance can seriously limit your investment options and color your judgment.

Two extremes to avoid: Elvis Presley, who always paid the top tax rate when it was over 70 percent (Hell, I'll just make more money if I need more.) The other is a professional gambling friend who was so tax-averse that most of his investments ended up being with scam artists. They promised him no paper trail, no K-1's or 1099's or W-2's, and all his (nonexistent) returns in untraceable cash.

Commission can be a conflict of interest. Your first mistake when selling a house is agreeing on a listing price with the real estate agent. The agent gets a commission on the sale, but if he convinces you to sell for, say, 85 percent of full price, he'll get 85 percent of his commission and have a supereasy selling job because you're giving your house away. Likewise, in the offer-counteroffer process, his financial interest is in completing the deal and banking a commission, not prolonging the selling process for a tiny commission increase.

Avoid horses, boats, airplanes, wives, kids, co-ops, time-shares, and country clubs.

Don't take a risk if you're going to be too quick to give up or cash in.

Take the biggest risks when you're young. But you're young for a long time. Because you take care of your body and seek joy in life, and place your faith in something bigger than yourself.

If you want to know what it's like to deal with a credit card companies, carry a $100 credit-card balance for two months. You'll not only pay 25 percent annual interest on that balance, but they'll hit you with a pair of $25 late fees. Your $100 debt is now $154 (300 percent annualized interest!), not including future increased lending rates. (Home-equity loan rates, for example, are based on credit scores, so you'll pay more even on loans secured by your house once you mess up your credit.) Set up automatic bill payment based on credit-card due dates rather than arbitrary ones like "first of the month."

It's hard to call this a rule because I think it speaks to my particular money psychology as a gambler, but I've found that my management skill is enhanced when I divide my mental wallet into real and play money. I observe all the rules above with the money my family and I depend on. But I've always set aside some dough for stuff that interests me and might result in a big score but won't devastate me if it goes to zero. My thing right now is Ripple, a bitcoin-related alternative currency, but it's ranged from speculative real estate investing to just plain gambling, some of which has actually turned a profit. The main value of this pressure-release valve is that it's kept me from dipping into my real money to chase some white horse.

Airlines build frequent-flier-mile costs into their prices, so you lose if you don't take maximum advantage. Same with credit-card points and customer-loyalty plans. But don't live your life as a quest to get the last dime out of your yogurt punch card.