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.

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 und 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.

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.

When you get to the next stage—that is, when you have between $25,000 and $100,000 to invest—you can take a multilayered approach to your investing. I like the following simple five-part formula.

1. Cash. The first money you save should be marked for emergencies. This needs to be put someplace that is secure but easy to access, such as a home safe or a safe-deposit box. The amount you should keep for emergencies depends on your personal situation: how much you typically spend, how reliable your income is, and so on. As a rule of thumb, though, I’d recommend about 10 percent of your investable net worth. If you have $100,000, that would be $10,000.

2. Income-generating real estate. I recommend buying and flipping real estate for everyone, even beginners. If you start when you have less than $25,000 to invest and make a few deals, by the time your investable net worth hits $100,000, you should have a pretty active, nicely profitable second stream of income.

3. Side business(es). If you didn’t want to get involved in a side business when you had less than $25,000 to invest, you should consider it at this stage. You don’t have to risk a ton of money. Invest $10,000 conservatively in a business you understand and see where that takes you.

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.

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.

I believe we are at the tail end of a nationwide real estate bubble. By any fundamental perspective, property prices have gotten out of hand. In some locations, this may mean a significant depreciation. In other, better locations (the Sun Belt, certain cities), it may mean a two- to four-year deflation of 10 percent or 15 percent. The worst depreciation will probably occur with condominiums, which are traditionally overpriced, overfinanced, and too heavily owned by speculators during bubble periods. That said, I’m confident that you will be able to find good real estate deals this year, next year, and each year thereafter during the downturn.

I’m no Donald Trump. I don’t even consider myself a professional real estate investor. I’m a professional marketer who has made real estate investing a nice sideline business. But in the 11 years that I’ve been doing it, my real estate portfolio has grown and grown. As an income producer, real estate has never failed to provide me with less than a very substantial income. As an asset builder, my rental real estate properties have all paid for themselves and provided me with a rate of return that is at least 10 times what I’ve been able to get from stocks and bonds.

Muni funds can also play with the value of your shares to your disadvantage. Muni issues are rarely traded. Muni managers can use any reasonable value for fund assets. Though credit quality may have deteriorated, managers often refrain from writing down asset values for fear of losing shareholders. However, at some point asset values must be marked to market to avoid outright fraud and jail time for the fund managers. If you buy fund shares at a high valuation of assets and later have to redeem when assets are written down to realistic levels, you will justifiably feel betrayed.

Fund managers can also turn tax-free munis into taxable bonds. Capital gains from selling appreciated muni bonds are taxable. Individual savers typically hold munis until maturity so there are no capital gains. Muni fund managers trade bonds. This creates capital gains, often short-term capital gains, which are taxed at the highest rate. Muni funds are outside the comfort zone of most savers.

Munis have tremendous tax advantages. Interest paid is not subject to federal, state, or local taxes. However, many savers will find the tax advantage caused them to invest outside their comfort zone. Calls, volatility, and insecure principal may be more than you can handle.

Trust issues are worse for muni funds than for other bond funds. Muni funds offer the advantage of diversification and professional management.

Unfortunately, the fees eat up as much as 25 percent of your interest. This is seldom worthwhile. Muni fund managers rarely outperform a list of unmanaged bonds. Many also try to rev up returns with lower credit issues, including junk munis, and borrow against the fund to increase investments in an attempt to time the market. These tactics are not likely to improve your sleep.