Bill Tammeus
http://www.NewsAndOpinion.com -- Alan Greenspan, the wizard behind the Federal Reserve Bank's curtain, recently made one of his rare (no more than once or thrice a day) appearances before a Senate committee.
He used the occasion to complain that many Americans are financially illiterate and need to be better educated if they are to understand anything he says. Well, no, he didn't say the part about anything he says because even Greenspan knows that one of the economy's largest sectors is made up of economists who spend their days trying to unravel the gelatinously impenetrable words Greenspan uses to maintain his position as wizard.
Rather, these were his inexact words: "For an increasingly complex financial system to function effectively, widespread dissemination of timely financial and other relevant information among educated market participants is essential if they are to make the type of informed judgments that promote their own well-being and foster the most efficient allocation of capital."
See if you can read Greenspan's words without taking a breath. If you can, you clearly have the lung capacity to have competed well in the most stressful events of the Winter Olympics.
No matter how he inflates the language, Greenspan has a decent point. Which is that you and I need to be better informed so we don't make the same mistake too many Enron employees made by betting the farm on one single stock. We need to be smarter about personal investment decisions.
So I'm going to help by giving you a glossary of terms you should understand if you are to have any hope of reaching retirement without living in the poorhouse.
Bank. This is where you take your money for safekeeping. The bank, however, doesn't safekeep it. Instead, it lends it to people like you to buy cars and houses. Because of that, neither you nor the bank has any money. The bank gave your money back to you in a loan and you used it to buy a car.
Car dealer. This, then, is where you should go to borrow money. Pension. Rhymes with tension. Your company will send you a little money each month after you retire and call it a pension if you promise not to come back to the office any more. There are two types of pensions. You have the other kind. Which you would have known if only you'd read all that printed material that looked as if it were written in Sanskrit by Alan Greenspan.
401(k). This is the third type of pension that I failed to mention when I was talking about pensions. Which I was just a minute ago. Really. The difference is that in a 401(k) plan, you get to make the bad investment choices instead of relying on an expert to make them.
IRA. This is the fourth type of the two types of pension plan that I also failed to mention earlier. The thing about IRAs is that you have to put all your own money into them and then, eventually, take it out, unless you own a Roth IRA, in which case you never have to take any of the money out but can leave it to Greenspan so eventually he can afford to take locution lessons.
Mutual funds. Instead of buying one bad stock, you can pool your money with other ignorant investors and buy a whole bunch of bad stocks at once. This collection of bad stocks is called a mutual fund. Sometimes the fund also includes bonds.
Bonds. These sometimes are found in mutual funds that also contain stocks.
Stocks. These are what keep bonds company in some mutual funds.
Social Security. If you are under 50, you don't need to
JWR contributor Bill Tammeus' latest book is "A Gift of Meaning." To order it, please click on title. To comment on his column, please click here.
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