This diatribe is about the couple of the scams that banks try to run on you passing them off as "opportunities" for you. Think about banks as you would Las Vegas Casinos. You're at a blackjack table, and the dealer tells you about unique bets they allow you to make: Insurance, for instance, against a dealer's blackjack; or any of various progressive jackpot bets. Just do the math, and you'll figure out why the dealers are required to tell you about them (and they are required to tell you about them). Because it's in the house's interest for you to make the bet. And if it's in the house's interest for you to make the bet, then it's not in your interest to make the bet.

Here's the most common scam: Paying additional monthly principle. (I am astonished at the number of highly intelligent people, many of whom hold advanced degrees in fields like business, economics, or law, who don't seem to understand that this is a scam.)

The basic scam story is this: You pay a little bit extra every month, and it all goes directly into the principle. This sounds really good in contrast to your regular payment, which, early on, goes almost entirely into interest. The story continues, that if do this every month, however little you contribute, you can pay off your loan years early, saving you all those years of payments.

There's nothing completely untrue about any of this. If you add just $10 to your monthly payment, that's $3600 at the end of 30 years. Say your monthly payments are $1000 a month. This might mean that you pay off your loan 3 months early.

But check it out. You can dig a hole and bury that $10 every month. And at the end of 30 years you'll have that same $3600. At that point you can unearth your money, call your bank, and tell them you intend to pay off the remainder of the principle. You will have done exactly the same thing.

What's the difference then? Why is it a scam? Well . . . ask yourself this, question: "Why don't people dig holes and bury their money these days?" The answer is, because you can do something else with that $10 each month. For example, put it in a savings account and earn a measly 2% interest. That's 2% interest that your mortgage company is not giving you.

That first $10 earning 2% APR over 30 years should be worth $17.75. If, rather than giving your mortgage company $10 every month interest free, you put that $10 in a savings account earning just 4% APR, you would have $6940 instead of $3600.

Hell, if that's too much work, give the money to me and you'll have my eternal gratitude. That gratitude you won't get from your mortgage company.

It would make sense to pay additional principle if your mortgage company recalculated the interest on your loan monthly. In pre-digital times that would be asking a lot. But today, with computers, they should be able to do this at the touch of a key. It's a really simple calculation. But do you think they do that? What would be their incentive to change their old ways?

Does it really take a bank five days to clear a check? Maybe it did way back when. But they have a policy in place, and it seems to work fine for them. So why should they change? The way it is now, if they clear your deposit in 2 seconds, then they get to play with your money for five days without giving you any credit for it. Do the same thing on a massive scale, and you've got piles of money that you're borrowing interest free.

The same is the case for paying additional principle on your mortgage. The money that you give is interest free, which, over 30 years, would amount to about $.35 per dollar per percent of APR.

Making Biweekly Mortgage Payments

This is merely a variation on the "extra principle" scam. The banks have been emailing and calling me with this great program to split my mortgage payment into biweekly payments. By doing this, they claim that I can pay off my mortgage years in advance.

This sounded too good to be true. And, after I called the people to get the details about the program, I found that it was.

Here's the deal. There are 12 months in a year. But there are 52 weeks. So by making a payment every 2 weeks you are not making 24 payments but 26. It is those extra 2 payments per month that make the difference. Those payments go toward your principle and reduce the period of your loan.

But just like paying additional principle each month, you don't get any credit for these additional payments until the very end of your loan. Again, you're effectively giving your mortgage company your money interest free.

Cost Averaging

This scam is really a beaut. I've even seen it with charts, which, of course, prove that it must be true. The idea is that rather than putting all your money in the market at one time, you should divide your investment across time. By doing this you reduce your risk and you end up paying less per share of stock.

Can this really be true? Do you really pay less per share of stock simply by splitting up your investment? The so-called experts all say yes. Here's their argument.

Their premise is that the market is unpredictable, so you never know the best time to buy. Reasonable enough.

Their solution is to buy at multiple points. This way, unless you're really really unlucky, you're unlikely to get screwed by buying at the highest point. Again, reasonable.

Here's the example I see over and over again. Let's say you have $500 to invest. Today, the stock or fund you want to buy is $10 a share. If you invested everything today, you'd have 50 shares.

On the other hand, you can spread out your investment over 5 months. So you buy 10 shares at $10 today. Next month, the price goes down to $5, so you get 20 shares. The following month, the price is down to $1, so you get 100 shares. The fourth month the price is up to $5, so you get 20 shares. And the last month of this period the price is up to $10 again, so you get 10 shares.

At the end of five months, the person who invested all at once has 50 shares and it's still worth $500. But the person who invested over time has 150 shares with $1500 for the same investment.

I find it astonishing that this actually convinces anyone. As I sure you've figured out, they don't bother to show you what happens if the market goes in the other direction. In their example the price per share drops to half, and then one tenth of the first month price before coming back to that price. If the price doubles and then trades as ten times the price of the first month, you end up with 21 shares worth $210 at the end of the five month period.

But why does it matter? If the market is simply unpredictable, then why not do it their way? It might work the way they imagine it, it might work the other way; who knows?

Consider the rule of thumb that I mentioned at the top of the page. They want you to do this because they have something at stake. Stock brokers are like bookies. They don't care whether a particular team wins or loses. They don't expect to make their money on a single killing (though it's nice when you do). They make their money a little at a time. Bookies want two-way betting. They want nearly equal bets on both teams. They make their money on their small service charges. That's what stock brokers want. Sure, in the last decade of good times with the market just continuing to go up, a number of brokers might actually believe now that they can win by predicting the market. But the basic business is to allow you to assume all the risk of the market going up or down, and they just quietly collect their transaction fees.

And that's the deal. They make money every time you make a transaction.

It's funny how they market this idea. They say that this is the right strategy for young investors who are in it for the long run. Their rhetorical argument, though not entirely consistent, has something to do with the idea of long-term risk and trying to minimize it. Full investment, they say, is full risk. Better, the argument goes, to reduce that risk by spreading out the investment.

But let's think about it. If you're really in it for the long haul, how statistically significant are the market fluctuations over the period of five months? By spreading out your investment you might be spreading your risk, but only over five months. After that, you're fully invested, and you now have all the risk you would if you invested all $500 now. All you have done is to delay your full investment by five months. The reductio test would ask, if it's really better, in the long run, to delay investment, then why not just delay investment forever?

The answer is, the long-term investment argument is crap. Say what you will about cost averaging. In the right kind of market it might help you out. Over the short time of that cost averaging period you are indeed reducing your risk -- though you're paying for that reduced risk not only with reduced potential growth but also with service charges. But you're not doing a damn thing for your long-term risk. That's just marketing garbage. And it's long-term risk that we young investors in it for the long haul ostensibly care about.

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