The Bogleheads' Guide to Investing, 2nd Edition

Chapter Sixteen I helped put two children through Harvard—my broker’s children.

Of all the expenses investors pay, taxes have the potential for taking the biggest bite out of total returns.

—Michael LeBoeuf

Michael’s quote, made in jest, elicited a chuckle at our second annual Bogleheads get-together, which was held in Valley Forge, Pennsylvania, in June 2001. However, it isn’t funny when you examine the reality of it. A number of years ago, a college friend of Mel Lindauer, who later became a broker, confided that they had a “cute” saying at the brokerage house where he worked: “When someone buys or sells an investment, the broker makes money, and the brokerage house makes money, and two out of three ain’t bad.” Basically, Mel’s broker friend was saying that at his firm, at that time, the emphasis was on encouraging clients to buy and sell frequently (called churning) so they could earn commissions. Although we feel certain they didn’t purposely set out to lose any of their client’s money, nevertheless they knew that even if their investor clients didn’t make money, both the broker and the brokerage company would. You need to keep that thought in mind when you decide whether you want to handle your own investments or turn them over to a broker, since their interests and yours aren’t aligned.

Most Bogleheads are do-it-yourself investors (DIY investors). Some of us have used brokers in the past and at some point came to realize that they weren’t looking out for our best interests ...