on account of market microstructure frictions, transaction prices may deviate from the equilibrium price, generating transaction costs. As we have noted, the bid–ask spread is a frequently used indicator of market liquidity. This differential is an important component of trading costs, often referred to as implicit transaction costs to distinguish them from explicit costs such as brokerage fees and taxes. We will offer different measures of the spread, each one focusing on a different interpretation.

The quoted spread, or the difference between the best ask and best bid prices offered by liquidity suppliers, is an estimate of the costs that a generic investor incurs for a round-trip transaction, i.e. a purchase followed by a sale. On the other hand, the realized spread is an estimate of the gain a market-maker can expect to make from two consecutive transactions. We show that the two definitions coincide when transaction costs consist solely in order-processing costs. We will also show that the difference between the quoted and the realized spread, which is always positive or at least zero, is a positive function of adverse selection and inventory costs. This difference can also be affected by the number of transactions at prices within the spread, as well as by order fragmentation. Furthermore, we will provide a definition of the effective spread, which is twice the difference between the transaction price and the midpoint of the quoted bid–ask spread and is therefore a better proxy of transaction costs when quoted prices are not binding.

Socially responsible mutual funds are an extreme example of asset gatherers using your values and neediness to turn you into a profit center for them. Socially responsible funds buy companies that they deem good corporate citizens or that follow certain religious or moral guidelines. They tend to avoid tobacco stocks, companies that discriminate or do not hire union workers, firearms and weapons manufacturers, and companies that pollute the environment.

While you are under the illusion your money is doing good, mutual fund companies operate on the hard fact that socially responsible fund investors do not trade funds and have low standards for investment return. These funds all buy the same stocks and produce the same mediocre returns, but their asset bases grow steadily. In recent years, socially responsible funds have been among the fastest growing asset gatherers. More importantly, your investment does not go directly to the company doing “good.” Your cash is used to buy shares from other stockholders who are tired of the company. A direct investment in a socially responsible enterprise or in a public offering of new shares is rare. When you discover that your money is enriching fund managers, not you or your causes, you may feel betrayed. If stocks are outside your comfort zone, you will feel better giving directly to the endeavor you support and investing the rest of your funds within your comfort zone.

Fund organizations run many funds. They call themselves fund “families.”  Studies show that marketing, not high returns, increases funds under  management over the long-term. The fund families send you newsletters  and have Web sites. Every article is designed to encourage you to ignore  the results you have gotten and buy more product. Your mailbox will also be  stuffed with bulletins about new funds, account statements, proxy statements,  and tax statements. The more money you have with the family, the  higher the level of service and status you can achieve within the family. You  can move up from ordinary to preferred to gold to platinum to admiralty.

Switching funds within the fund group is convenient and quick. To switch  from a rival fund, they will even do all the paperwork for you. But moving  out of the family is discouraged. If you are dissatisfied with one of their  funds, they hope your sense of loyalty and desire for convenience will cause  you to buy another fund within the family. Retaining your mutual funds is  their primary goal.

Some funds close to new investors. This gives existing investors the  illusion that they own an exclusive product, which discourages them from  selling. Some funds also impose penalties for early withdrawals. This keeps  your money under management and creates a steady income stream for the  fund manager.

As with any good dysfunctional family, there are many secrets. You  cannot find out what stocks your fund owns more than every six months,  and then only 45 days after the six-month period ends. Nor can you get any  information explaining why one manager was fired and another hired. Even  mutual fund watchdogs such as Lipper and Morningstar cannot obtain this  information. It is as if this is not your money but the family’s money.

If you have family abandonment issues, mutual fund investing will be  troublesome. Seeking approval and support for your emotional deficiencies  will cause you to stay with poor funds when better returns are available  elsewhere. Severe depression could follow.

The personal change process is harder than the process described in this book. Outside help is necessary. You deserve to have a happy investment life just as you deserve to have a happy relationship. To achieve personal change, you can commit yourself to a codependence treatment program, see a psychiatrist, take prescribed medication, go to a trained psychologist or therapist, attend group psychotherapy, commit to Gamblers Anonymous, and enlist the support of family, friends, and work colleagues.

But you must get help. You cannot fix yourself. You cannot use a broken tool to fix a broken tool. The input of trained professionals and those who have recovered is absolutely necessary.

For most of you, however, Step 1 is the entryway to your comfort zone.

You could, for example, create a side business selling a skill you currently have (accounting, legal, writing, editing, purchasing, etc.) or could develop (graphic design, copywriting, resume writing, etc.). Or you could turn a hobby or passion (stamp collecting, gardening, pets) into a profitable, Internetbased direct-marketing business.

As your side business grows, it will require that you reinvest some of the profits into creating new products, hiring employees, and developing new advertising campaigns. You should allow for growth, but limit it to avoid growing so fast that you end up losing control and getting into trouble.

Equity-building real estate. Buying equity-building real estate means buying rental properties. The trick to making this work for you at this second stage of wealth is to buy conservatively— that is, to make sure that the rent you’ll get will at least meet (but should really exceed) your cost of maintaining the property. I recommend duplexes, triplexes, and quadruplexes to start. They’ll give you the best chance to achieve zero or positive monthly cash flow. How much equity-building real estate should you develop? If you have a net worth of $100,000, I’d recommend a little more than half. Let’s say $60,000.

Fixed-income instruments. The rest of your money should be in Treasuries, municipal bonds, or quality corporate paper. Fixedincome instruments like these don’t provide a high return, but they are safe.

You can invest a small amount of money (and a lot of hard work and well-spent time) in a small business and see it grow into a business that is worth a million in seven years. I’ve done it many times. I’ve coached people who have done it. Stories are published in magazines every month about people who have done it.

But let’s be frank. With only $18,000 to $25,000 to invest, it won’t be easy. That’s why I like to encourage Early to Rise readers who are at this first wealth-building stage to focus most of their time and efforts on building their income. Doubling your income in a year or two is entirely possible if you follow the advice I gave you in previous posts. And if you double your income and don’t double your lifestyle, you’ll have a lot more money left over to ensure the success of your small side business.

Here are five things I recommend if you are in this situation:

1. Find a way to radically increase your salary by making yourself radically more valuable at work.
2. Resist the temptation to spend more money as your income rises.
3. Put some of your savings down on an undervalued, small, single-family house, fix it up fast, and sell it for a profit.
4. Reinvest that original capital plus the profit in another buyand-flip deal. Keep doing this until it becomes a very pleasant habit.
5. Invest another portion of your savings in a part-time, weekend business. Sell a product or service you know and understand.

Make sure you are not a pioneer. Unless there are others actively selling the same thing, you don’t want to be in the market. The idea is to enter an active market with a better/cleverer/cheaper version of what others are selling. Sell only by direct response—print, mail, and Internet. Go carefully and learn from your mistakes.

I’ve mentored several friends and relatives in starting up small businesses. The first years were always a struggle, because they were trying to find ways to efficiently bring in new customers. Once a way was found, things got much easier. Developing a back end (i.e., selling other, usually more-expensive products to existing customers) is relatively easy, as is refining operations.

A typical business start-up of this kind will break even or lose a little money in year one, make a decent salary for the owner in year two, and provide a substantial bonus—in addition to a good, arm’s-length management salary—in year three. After that, it’s usually straight uphill.

If your scope is seven years or less, there is only one answer: Start a business. You can’t start a capital-intensive business with $18,000. You can’t, for example, open a restaurant or create a new line of pharmaceuticals. But you don’t want to be in those businesses anyway. (The risk/reward ratio isn’t working for you.) Much better to start a business selling something you know about—such as gardening or collecting beer steins or taking care of pets. You can start a little business like this for a few thousand dollars if you start small and go slowly—at first.

It’s true. And you will probably never hear this from any other wealth-building “expert.” Unless you have more than $25,000 to invest, you probably shouldn’t be investing in individual stocks—and you definitely shouldn’t be trading options and futures.

The reason is simple: You want to get wealthy in 7 to 15 years— preferably in less than 7. There is no way that $25,000 can turn into something that even sounds like wealth in that amount of time— hough there are a lot of professional investment gurus who will tell you otherwise. In fact, there is a huge, multi-billion-dollar business that is determined to snow you on this issue.

So now you know how I feel about stocks, small business, and real estate. Bonds? I love bonds. Especially if you invest in them the way I do: Buy them. Be happy with the guaranteed return. And forget about them.

With this perspective made clear, you will see some sense in the following four model portfolios, each based on a stage of wealth building.

• Stage One: Your investable net worth is less than $25,000.
• Stage Two: Your investable net worth is between $25,000 and $100,000.
• Stage Three: Your investable net worth is more than $100,000 but less than you need to be financially independent.
• Stage Four: You are financially independent.