For people following a sensible strategy of “buy and hold index funds,” that’s never a worry. You’re typically buying from a no-load source such as Vanguard or Fidelity. And you’re not trying to figure out what’s good or what’s bad — you’re just buying a little piece of all of it. For more on this strategy, go look at this.

It’s really this simple: The more you know about financial markets, the less you will try to play them. The less you know about financial markets, the less you should try to play them. Playing financial markets is a losing game for most of the half-informed people who try, and only a winning game for people with inside information or superior trading access.

Outside a university finance lab

This is a new finance lab at the university where I teach. The students who study at this lab get advanced training in using Bloomberg information systems. Such labs are becoming increasingly common, and not just at the graduate (MBA) level. Most of the students using this lab are undergraduates. They’ll go out ready to work in the financial sector.

If you are an individual investor with a job and other obligations, you can’t beat these students-turning-finance whizzes in short-term trading. They can jump in and out of hot stocks while you’re still doing your morning’s work. And yet your portfolio can outperform theirs — if you’ll buy and hold index funds. Why? All those hotshots, competing with other hotshots who trained in similar labs, will get the average return to the market. They can’t all beat the market. But they’ll be doing it at higher costs than you, if you buy and hold for the long run.

Why am I so confident these hotshots won’t beat the market? Because the smartest hotshots of all get to run mutual funds — and mutual fund managers don’t systematically beat the market. Here’s the evidence. The number you are looking for is the percentage of mutual fund managers who did not beat the appropriate index. That number is usually over 50 percent. So don’t worry about the young hotshots training in the finance lab, or what they’ll do when they enter the world of finance. You’ll outperform the majority of them by buying and holding index funds. (Yes, there are lots of complications. Read my book to find out more. But even after all the qualifiers and footnotes, the basic conclusion holds.)

The investment strategy that comes from this new information is old indeed — simple diversification. If you diversify your portfolio as recommended in my book, you get the benefit of having bonds in your portfolio. You have less in bonds when you’re young and more when you’re old. And you avoid “flavor-of-the-month” investing in which you change strategy to follow the latest hot asset.

If you had followed the “Dow 36,000” strategy when it was hot, you’d have missed the excellent returns on bonds that are now being reported. And if you now concentrate on bonds to the exclusion of stocks, you’re setting yourself up for a big disappointment. My best advice: get diversified, and stay diversified.

The chart above reflects what happened right after the big U.S. debt downgrade. That downgrade had been rumored for weeks and months — so when it hit on August 5, the smart money was not surprised, even a little. What if you sold your stocks after that first panicked day of selling? You would have lost a bunch of money for no good reason.

Despite all that volatility, after two weeks the market was about where it had started out. With perfect foresight, of course, you could have sold out at the tops and bought in again at the bottom. But no one has perfect foresight. That’s why “buy and hold” is the way to go with your serious money. Forget about trying to make money (or even preserve your money) by buying and selling on peaks such as those in the chart. Several important points:

• There is no guarantee that the market will always recover. If there were such a guarantee, stocks would be safe and the return would be lower as a result.
• Most big events are already embodied in stock prices before you can act. That was true for the downgrade. By the time it happened, it wasn’t new news to any of the smart money.
• If your financial adviser promises to “time the market” for you, run to the door and get your money out. Don’t walk.

Of course, we all know that “free” checking really isn’t free. But the traditional free checking account promised no monthly service charges, no per-check fees, and no debit card swipe fees if you would maintain a modest minimum balance. That’s the kind of account that is now endangered.

Why is it endangered? It seems to be an unintended side effect of regulation. I heard from a banking industry guy that it costs his bank $6 a month just to keep a checking account open. The bank would receive fees from a merchant every time the customer swiped a debit card. The revenue from this and other fees averaged way over $6 a month per account, so “free” checking was profitable for the bank.

Enter the Dodd-Frank financial reform law. It authorized reductions in various bank fees — but especially in debit card swipe fees. The bank will make less on those fees, but still incurs those costs for maintaining your account.

Banks are responding in different ways. Some are preparing to impose new monthly maintenance fees, generally between $4 and $11 per month. Others will charge for statements or impose new per-swipe fees on debit cards. Here are some suggestions for keeping your bank charges low:

• Combine accounts where possible. If you have an extra checking account you rarely use, go ahead and close it. Sometimes you’re legally required to have funds in a separate account. And sometimes extra accounts are a good idea for couples. But a small-balance checking account will, under the new rules, lose value because of maintenance fees every month.
• Opt for electronic statements. Many banks are beginning to charge for mailed statements. You can still print and save your electronic monthly statement — but be aware that some banks will charge you even for generating an electronic statement with pictures of the checks.
• Seek out a bank that offers a better deal. This will often be a smaller or newer bank in your community. Here’s a bank, for example, that has no monthly service charge. It charges 50 cents per debit card swipe but waives the fee if you choose “credit card” at the checkout and sign your name. At many retail terminals, you have to swipe the card and hit “cancel” when it asks for your PIN to do this. And, whenever your swipe runs as “debit,” that’s 50 cents more coming out of your checking account.
• Check mailings from your bank closely, even the back of the statement if you still get a paper one. The banks are implementing their fees under cheerful slogans such as “Bright Banking” or “Bank Your Way.” (What’s “bright” about more fees? Why is paying a new fee “my way”?) All the required disclosures are there, but you may miss them if you don’t pay attention.(That’s the practical advice. I have a few more points after the break.)

Just a few more notes about all this:

1. We economists are fond of saying “there’s no such thing as a free lunch.” Traditional free checking wasn’t really free, in that it was supported by invisible debit card fees paid by merchants to banks. Yet that wasn’t so bad, because it encouraged people to use debit card PIN transactions — and those made checkout lines move faster. There are lots of ways of shifting costs around, and the old method may look pretty good in retrospect, especially if a lot of people start writing paper checks again.

2. Another economist-type point. Some commentators imply that banks will raise monthly fees “to recover lost revenue.” Although they don’t quite say it, they imply that banks have a certain amount of profit they’ll always get. In this way of thinking, the banks will always get that profit one way or another.But it’s not so simple as that. If monthly fees would always have raised bank profits, then the banks would have implemented them without waiting for reduced swipe fees as an excuse. The point is: Under the old rules, monthly fees would not have raised bank profits, because competing banks could offer free checking and get profitable business away from their fee-minded rivals.The real cause is more subtle: with reduced swipe fees, regular free checking accounts are unprofitable. So competition can’t work in the same way. Under the new rules, a bank tacking on a monthly fee need not worry about losing customers to the bank down the street — because that bank won’t make money with free checking either.

3. I’m not bashing Dodd-Frank here. I’ll leave the overall evaluation of the law to others. On this one point, however, it’s not clear how it will all shake out. Even as banks get a worse deal on debit card swipes, the merchants get a better deal by paying a lower fee. Will those lower fees be passed along in lower prices? And, how will the banking changes settle out? Will competition keep monthly maintenance fees low? Or will the banks come up with bundles that allow many customers to avoid fees? It’s way too early to answer all these questions — but free checking and debit swipes, as they worked for years, may actually have been a pretty good way of sharing out the costs involved.

4. Did Congress adopt this particular part of the law to get back at banks for their role in the financial crisis? Did it envision higher monthly service charges for bank customers at the time, or did it think the reductions would be absorbed or shifted?

Yes, there is. Here is how I have smartphone service for under $10 per month: I bought a new, unlocked LG Optimus T for $185 from a well-regarded eBay vendor. I got AT&T prepaid GoPhone service, put $100 on that, and bought 100MB of data for $19.99.

Now, here’s the key: I use as much data as I want without charge wherever there’s free wifi (including my office, my home, and my favorite restaurant). When I’m out of range I use data for any reasonable purpose — but don’t stream any music or videos. The result: 100MB of data lasts a long time. To keep my data current, I roll it over once a month for $4.99. Text + data + voice runs less than $10 a month, on average.

This is not for everyone. If you want instant access to Internet, music and video anywhere — or if you spend a lot of time talking and texting — you’re better off with an unlimited plan.

Finally, for those who think $185 is a lot to pay for a phone and get one “free” with an unlimited plan for only $60 a month: That adds up to $1440 over two years. My approximate expense for those two years is about $240 for service plus $185 for the phone, or $425.

For more on this strategy, here’s a thread with full details that gave me the idea.

But survivorship is something totally different. It’s a source of bias in mutual fund returns. Here’s how it works. Say a mutual fund company starts five different funds, each trying a different strategy. Three do well and two fail miserably. Those two funds get closed.

Now, the three remaining funds look good — even above average! And that will be true, even if the five funds, taken together, had mediocre statistics or worse.

The lesson: Beware of mutual fund companies that imply they can “beat the market.”

For more on survivorship bias, see http://www.indexfunds.com/articles/20010413_survivorship_com_act_LS.htm