The 14 Truths You Must Know When You Invest

Nonetheless, taxes average about 3% a year. Compound 3% a year for 30 years and see the damage it has on your retirement. Taxes chew up almost 60% of your returns.

Now, what can an investor do? Clearly, passive funds are more tax-efficient, such as ETFs or even active tax-managed funds. People need to pay more attention to taxes: If you lose 1.5% a year in expenses and 3% a year in taxes, which is bigger? Taxes! Focus on them.

Truth 12: Knowledge of Financial History Is Critical.

People think the bubble of the 1990s was different this time. It wasn't different, except that it was the Internet the time. I demonstrate in my book that if you just changed the names from JDS UniphaseJDSU and the rest to the [electronics] companies of the 1960s, it was exactly the same bubble -- same P/Es of 200, same IPO frenzy, same bursting and all the scandals that followed. People say, "Don't burst my bubble." I won't, but the market will.

People all said the Internet would change the world. These technology-inspired booms are remarkably similar. If individuals knew their financial history, they would have been wise to what was happening in the late 1990s. I mean, we had daytrading back in the 1700s!

Truth 13: Investors Confuse the Familiar With the Safe

Investors all over the world think you're country is the safest. We don't know if the U.S. is the safest market in the future. If you were 100% positive, Sept. 11 should've convinced you otherwise.

Your job, your livelihood, is tied up in the U.S. The prudent thing to do is [to] put as much as 40% of your money in international markets. It's hubris to believe otherwise.

This is one area where Jack Bogle and I disagree. He thinks you get all your international exposure from domestic stocks. I guarantee you if Bogle lived in Japan, he'd say you only need to own Japanese stocks. The data very clearly shows, if you look at long history, you get similar returns and lower volatility by diversifying with international holdings.

Even if you think the U.S. is highly likely to outperform, are you certain?

Truth 14: There's No One Right Portfolio, There's One Right for You

Most people don't develop their own strategy when it comes to investing, which is crazy. Can you imagine starting a business without a business plan?

When considering the right portfolio for you, it isn't just about risk tolerance, it's about the stability of your job, your ability to deal with tracking error -- when the market is way above or below your expected rate of return -- and your age/investment horizon. Of course, nobody cares about positive tracking error, which is silly, because that should get you thinking about negative tracking error. In 1998 and 1999, people who built a diversified portfolio would have had terrible relative returns. You have to stay the course.