We all know that the gold bugs are crowing like crazy because their beloved metal is up over 22.5 percent. But guess what is number two? A big surprise! U.S. treasuries that will indemnify you against the rages of inflation, also known as TIPS (Treasury Inflation-Protected Securities), are up 13 percent this year.

As of Wednesday’s close, the S&P 500 is about dead even with where it started this year. Smaller companies are down about 1 percent. It has been a wild ride to be sure, but no return has been made owning U.S. companies. Similarly, all the chatter about running out of oil seems to be lost on stock prices. Global energy stocks have been up and down, but they remain flat for the year.

U.S. bonds are up about 7 percent including dividends. Even though we are printing dollars like there is no tomorrow, U.S. treasuries are still considered the safest in the world. Imagine that—the same bonds that have been spat upon by the media for 11 months are generating incredible returns this year.

The 28 emerging market economies have been the worst performers. China, India, Brazil, and Russia are down over 15 percent, giving back last year’s gains of 15 percent. The more mature foreign developed economies, including Canada, Europe, Japan, and the rest of Asia, are down about 10 percent this year. This is largely because the greenback has been appreciating against other currencies. You’d never think that listening to CNBC and the media!

U.S. real estate is up about 4.5 percent, but foreign real estate is down about 10 percent.  That’s a big swing and speaks to the problems in the credit markets outside the United States because investors worry that landlords won’t be able to refinance their debt.

Since no one knows which way any of these markets will go next year, we continue recommending portfolios containing all markets and asset classes, in proportions specific to the individual. Our investors are trimming their gold and TIPs and adding to their foreign stocks. We are buying low and trimming high, anticipating that this year’s winners turn into next year’s losers.

As this year ends, you’ll start reading about all the managers who “outperformed their benchmarks,” but statistically, most will fall off the radar in the next year or two. As time goes by and capitalism works its magic, we make money by keeping our fees low with exchange-traded funds (ETFs) and tuning out the noise. ETFs avoid the unnecessary and hidden risks often found in active management, such as hidden leverage, quantitative algorithms predicting market moves, quirky money managers, conflicts of interest, and managers placing large bets with your money.

With one month to go, the markets haven’t yet spoken for 2011. But so far, those U.S. bonds that everyone has forsaken will either win, place, or show in this multi-horse race.

What many investors don’t know, however, is the Federal Reserve’s dirty little inflation secret. When the Fed reports on inflation, it reports on core inflation, a calculation that excludes food and energy costs.

The Fed has not always calculated inflation in this way. In February of 2000, the Federal Reserve rejected its old method of calculating inflation, which included food and energy, in favor of this new core inflation method, claiming that highly volatile food and energy prices made their influence impractical in determining monetary policy.

When you hear of the inflation rates of the late ’70s for instance, you are hearing about a number that included food and energy, whereas today’s number is skewed lower. Similar to how unemployment calculations have been skewed lower, using the 1970s method, both inflation and unemployment are higher today than most people realize.

The Fed has clearly revealed it wants inflation that is high enough to globally weaken the U.S. dollar, promote exports, and debase U.S. debt, but also low enough to keep investor confidence high and the economy moving forward. Fed chair Ben Bernanke has stated that the Fed is looking to stoke inflation to a rate of around 2 percent a year.

Unfortunately, inflation is not so easy to control. Inflation has a history of suddenly lurching out of control. Like a careening car that unexpectedly fishtails to one side, driver overcorrection will suddenly send the car dramatically sliding in the opposite direction and potentially out of control. Knowing this, the Fed wants to keep investors calm regarding the inflation story. Just last week, Bernanke suggested that inflation is not a threat and that the U.S. base interest rate will stay close to zero for an “extended period.”

What does this mean for you? Historically, developed economies have maintained an inflation rate of around 2 percent, while emerging economies have maintained a blended rate of around 6 percent. Strangely, these same economies tend to grow at similar rates as well.

People who live in emerging economies spend approximately 50 percent of their income on food and energy. In developed economies like the U.S., that drops to around 20 percent. Essentially, the poorer you are, the more your dollars must go to basic needs like food and energy. For the poor, their inflation tax goes up. Sadly, recent inflation of food, energy, and other basic commodities coupled with the deflation of the U.S. dollar is hitting many Americans harder than they may realize.

To respond to the inflation threat, every retirement portfolio needs to be inflation proofed. Start by allocating a part of your portfolio to Treasury Inflation-Protected Securities (TIPS). TIPS pay a stated dividend and also add the Consumer Price Index rate—a common measure of inflation—to the underlying value (PAR value) of the bond bi-annually.

Additionally, by adding exchange-traded funds like iShares S&P Global Energy (symbol IXC), iShares Dow Jones US Oil & Gas Ex Index (IEO), and iShares Dow Jones US Oil Equipment Index (IEZ) to your portfolio, you gain diversification to more than 300 companies impacted by the price of oil and gas.

Finally, add some precious metal exposure to your portfolio though ETFs like SPDR Gold Shares (GLD) or iShares Silver Trust (SLV), both of which will give you low-cost exposure to gold and silver. Beware of farming and food related ETFs because they involve futures contracts and are unpredictable.

But before you run out and turn your entire portfolio into an inflation hedge, remember that like inflation, deflation is also an ever-present risk. Just as quickly as the economy can careen toward inflation, a sudden overcorrection by the Fed can send the economy sliding wildly towards deflation.

Through global diversification and disciplined rebalancing, you can get the inflation pickpocket out of your wallet and rest assured that no matter which way the economy slides, you stand prepared to emerge a winner.

Everyone knows inflation is around the corner, the U.S. is going deeper and deeper into debt, and if you own a bond, it will only go down in value. At some point the U.S. is going to have to “pay the piper.” The Tea Party may not prevail upon the government to stop spending ourselves into oblivion.

If you are getting anxiety just reading these paragraphs, then you understand why the smartest investors in the world don’t engage in this conversation.

It has always been a bad idea to bet against America and our ability to prosper even against overwhelming difficulties. America will cut back its spending, innovate, and pay off its debts. We will earn our way out. It’s just how we do it. Selling treasuries is a bet against our ingenuity, work ethic, and our breed of capitalism that has made more dramatic changes to the world in the last 100 years than during any other period in human history.

When deciding how to invest, consider this: Actively-managed bond funds are the least likely of any funds to beat their benchmarks. A Standard and Poor’s study shows that from 2003 to 2008, only 7 percent of bond funds beat their indices. And while Bill Gross has “rock-star” status, his track record of predictions has been abysmal. Google “Bill Gross New Normal” and you can read about one wrong prediction after another since 2009. Gross cares that PIMCO’s assets keep growing because they generate over $12 billion per year in fees. Dire predictions in the media bring in new investors.

Large bond mutual funds control a miniscule portion of the $14 trillion of U.S. debt. The Federal Reserve holds $1.2 trillion, foreign countries hold nearly $5 trillion, and insurance companies, pension funds, and regular investors also hold their fair share of treasuries. There is no more efficient market than treasuries, and the Fed has the ability to manipulate it—irrespective of Bill Gross’s predictions.

But forget the chatter. The critical issue is the function of treasuries in your portfolio, not whether they should be in your portfolio. While treasuries generate income, they don’t come close to the returns from owning equities. From 1925 to 2003, treasuries only appreciated 5.4 percent per year or 61 times, while large stocks appreciated nearly 10.4 percent per year, or nearly 3,000 times. The other price you pay for holding bonds is inflation, which is bad for long-term bonds. While bonds increase in value in a deflationary environment when prices are dropping, this is a rare economic circumstance.

Treasuries protect you against catastrophic events in the world. They are your “go-to-sleep-at-night” funds. They went up in value after 9/11 and during the 2008 financial crisis. That’s why you own them. If you listen to Bill Gross and sell your treasuries, you’ll regret it the next time the sky starts falling.

The best and simplest way to own treasuries is to buy Vanguard’s Total Bond Fund ETF (BND), which is a basket of nearly 5,000 bonds and yields more than 3 percent a year. Worried about inflation? The average duration of all the bonds is only 5 years—only 8 percent of these bonds have durations greater than 20 years, and 25 percent are between one and three years. BND consists of 43 percent treasuries, 28 percent U.S.-guaranteed mortgages, and about 5 percent in foreign bonds. The rest is in investment-grade corporate bonds. For Vanguard to buy, hold, and rebalance, the annual fees are a paltry 0.12 percent.

Next time your heart palpitates as you read that the treasuries you own is a bad idea, consider the source and the function it has in your portfolio.

What’s an investor to do? Bulls say that the world needs more oil than producers can pump, refine, and distribute, and this is getting worse as the Chinese start owning and driving cars. What about alternative energy? They claim that these sources won’t make a meaningful impact for years. Bears say that OPEC will just turn on more oil because if they let prices get too high, their customers will have more incentive to find alternatives.

There are no easy answers to these questions which is why we build some energy exposure in to most of our portfolios. But if you want to place a “side bet” on energy you can use the MarketRiders service to invest in an energy portfolio we’ve made available to our members. This portfolio will  can give you a reasonable hedge against rising energy prices with ownership in over 300 operating companies, that are impacted by prices of oil and gas in various ways and allocated as follows:

Diversified global companies (20 percent). You want to own the largest globally-diversified oil and gas companies. If you buy iShares S&P Global Energy (IXC), you’ll buy stock in all of the 95 large players like ExxonMobil, Chevron, and BP. We include this ETF or one like it, in most MarketRiders portfolios.

Exploration and production (20 percent). These large companies that exclusively own and produce oil and gas are fully exposed to energy prices. The higher the price of oil and gas, the more they earn. Instead of trying to understand each company, buy the iShares Dow Jones US Oil & Gas Exploration Index (IEO), and you’ll own 60 companies like Occidental Petroleum and Apache.

Services (20 percent). These companies support the energy industry through services and equipment. They charge their customers more as energy prices increase. Buying the iShares Dow Jones US Oil Equipment Index (IEZ) gives you ownership in 44 energy services companies like Schlumberger, and Halliburton, and mid-sized ones like Noble and Helmerich & Payne.

Alternatives (10 percent). Alternative energy sources may save us from the eventual depletion of fossil fuels and if so, we want exposure to wind, solar, and Tesla cars. By owning the PowerShares WilderHill Clean Energy Index (PBW), you buy a stake in 60 companies all over the world that focus on greener and generally renewable sources of energy, and technologies that facilitate cleaner energy.

Pipelines (15 percent). Owning master limited partnerships (MLPs) gives you ownership of pipelines that transport crude oil, natural gas, and other refined petroleum products. MLPs generate fee-based revenues, which tend not to be directly tied to changes in commodity prices. Much like how Simon Malls owns shopping malls, which provide distribution for retailers like Macy’s, these companies provide distribution for energy companies. The JPMorgan Alerian MLP Index ETN (AMJ) gives you exposure to the large U.S. pipeline companies like Enterprise Products (EPD) and Kinder Morgan (KMP). And it pays over a 6 percent dividend.

Utilities (15 percent). The Utilities Select Sector Index (XLU) includes electric and gas utilities, independent power producers including PG&E, Southern Company, and Duke Energy. XLU pays over a 4 percent dividend.

Note that we are not recommending energy ETFs that own futures contracts like United States Oil (USO) or United States Natural Gas (UNG). These ETFs are baskets of contracts (not companies) to buy actual gas and oil in the future. For many technical reasons, these contracts can lose value irrespective of oil and gas prices, and they have not performed as advertised. Our Energy Hedge Fund only consists of operating companies that participate in the sector.

To see this portfolio. log into your account and click on “Create A Portfolio” and then click on “Let Me Build It.”  Click on the first radio button “I would like to build an ETF portfolio using a Template” and find the template portfolio called “Energy Hedge Fund.”

At MarketRiders, we stress a “core and explore” philosophy and our core model portfolios have energy included. But if you want to “explore” energy, up or down, this is the most logical and low-cost way (0.52 percent annual fees) to apportion a “side bet” on the sector. Hopefully you’ll be the one bragging at a party in 2015.

Egypt brings these risks home. If you want to invest in the Egyptian stock market, you can purchase shares of an exchange-traded fund (ETF) called the Market Vectors Egypt Index ETF (symbol EGPT), which holds all the important stocks in Egypt. When protests broke out last week, the markets decided that all of the largest companies in Egypt were worth 25 percent less than they were a day before, and EGPT fell by that amount!

Investing in foreign companies in the 27 developed countries (such as the UK, France, Germany, Japan, Australia, and Canada) gives you further diversification and is much less risky. In fact, over long periods of time, these economies perform like the U.S. stock market. Between 1970 and 2004, those stock markets appreciated 10 percent per year compared with the S&P 500 growth of 11 percent.

Every retirement investor should own these foreign stocks because they reduce risk in a portfolio in two key ways. First, you’ll own stocks in other currencies. If the U.S. dollar declines against the Yen or the Euro, these stocks will appreciate. Second, other countries have their unique responses to their own economic circumstances, their governments, their populations, and tax rates-all of which are different than the U.S. In the 1980s, the experts said Japan was going to take over the world and their stock market rose 28 percent versus the U.S., which returned 17 percent. In the 1990s, Japan’s markets tumbled and only recently have begun to recover. Demographics can also impact a country and the value of its companies. For example, other countries don’t have “baby-boomers” and their populations are aging in different ways.

Therefore, owning a basket of developed foreign stocks provides equity ownership that doesn’t always have the same fluctuations as U.S. stocks, which reduces risk in a portfolio.

In our MarketRiders retirement portfolios, we allocate about 30 to 35 percent of our equity exposure (not fixed-income), to non-U.S. stocks. Most of that allocation goes to developed countries instead of emerging-market countries.

Investors should own foreign developed country stocks through ETFs instead of mutual funds. The costs are low and active mutual fund managers statistically don’t do better than the indexes they attempt to beat. Also, foreign country mutual funds tend to have very high fees-it’s expensive to fly fund managers all over the world to research companies in foreign countries. Instead of paying high fees, just buy an ETF that holds all of the stocks in all of the countries that matter.

We recommend three ETFs in most of our portfolios. By owning shares in Vanguard European ETF (VGK), you own a basket of 481 large companies in 16 European countries and pay only 0.16 percent in annual fees, which is 10 percent of the cost of comparable mutual funds. Adding Vanguard Pacific ETF (VPL) gives you ownership of 493 large companies in Japan, Australia, Hong Kong, Singapore, and New Zealand. We allocate a small amount to iShares MSCI Canada Index (EWC), which charges 0.53 percent in annual fees.

Here’s the best part: With these three ETFs, you don’t have to worry about which country will grow faster, or whether Toyota will do better than BMW because you will own all of these stocks and capture the growth of these countries and their currencies. As for uprisings, you might sleep better with less risk of that occurring in these countries.

The consensus for fleeing bonds has become more powerful with each passing week. The first notable warning shot came from Warren Buffett at his annual Berkshire Hathaway meeting when he predicted the future demise of the bond market. Soon after, the Vanguard Group announced worries about bond instability. Journalists, economists, and wealth managers have joined in chorus proclaiming disaster in the bond market. With such a dire consensus, why would any investor still buy bonds?

One idea investors should understand is what we call the Third Newtonian Law of Economic Motion: For every economist, there is an equal and opposite economist. You don’t have to look far to find great minds lining up on the side of a long deflation wave fueled by a mind-boggling backlog of massive debt. Take Jan Hatzius, Goldman Sachs’ chief U.S. economist, who has been nothing short of shrill in warning of the severe deflationary risk still facing America and the world. Furthermore, according to a National Association for Business Economics (NABE) survey, 30 percent of their members still believe deflation is our primary risk for the next five years. Although no longer the majority view, deflation is still a concern for many.

Now consider John Mauldin, who publishes one of the nation’s leading financial newsletters. Last week he cited Gary Shilling’s predictions for 2011 in his annual investment strategies article entitled “9 Buys, 9 Sells.” Shilling’s first and most emphatic recommendation is, of all things, to buy bonds! Shilling passionately lays out eight arguments, from the hard landing of the Chinese economy to the U.S. suffering a Japan-like malaise, all in favor of bonds as an outperforming asset class for the next five years.

What then is the answer? Should one buy or sell bonds? The answer lies in one’s philosophy toward investing itself. If an investor is a long-term and principled retirement investor, he or she can escape the clamor of mass hysteria by sticking to a disciplined approach that rises above such frays. Will inflation or deflation rule the day? The principled investor humbly answers, “I don’t know.” Today it looks like we are leaning toward inflation. Tomorrow, news about a country or state defaulting, China’s inflation rate running rampant, or some other disruptive event may send deflationary fears toward the ceiling.  Yesterday’s news in Egypt sent investors back to bonds — go figure!

For the principled retirement investor, bonds are a critical asset class in a well-diversified portfolio. Much like a rock band that needs lead, rhythm and bass guitars backed by drums, so a retirement investor needs a bond allocation to make his portfolio sing. All the pieces of a retirement portfolio work together to make beautiful investment music. Each asset serves to help returns or mitigate risk in an atmosphere of intelligent skepticism about economic predictions. This approach dictates that it may be time to rebalance your portfolio by trimming equities that are flying high, and buying a few more bonds.

Owning real estate has its own set of risks and benefits. A property that is well-located and leased gives you debt-like cash flow with the opportunity for appreciation like stocks. Leased buildings are valued based upon the stability of cash flow from rents and the cost to replace the building. Real estate also protects you against inflation, as its value tends to move closely with the costs required to replace it-think land, bricks, concrete, steel, labor, and fixtures. These costs rise with inflation, and landlords raise rents over time if inflation grows.

Most investors, however, don’t want to buy a building. Fortunately, it’s easy to own real estate without ever fixing a toilet, or worrying about a roof caving in during a winter storm. You can get a well-diversified real estate portfolio by owning real estate in the form of real estate investment trusts (REITs). These are unique public securities because they pay no taxes and pass through 90 percent of their income to investors in dividends. From 1970-2009, public REITs returned an average of 9.1 percent per year. That means money invested in REITs doubled every eight years!

That doesn’t mean real estate won’t have ups and downs. REITs tend to trade in large swings between the fair value of the real estate held in the REIT to the stock price-from a 20 percent discount to a 20 percent premium. As you can see from the green box on this chart, between 2000 and 2009 REITs have been up or down by more than 35 percent. But while the stocks may swing, you can sleep at night knowing that you own hard, rent-paying assets.

The best way to own REITs is through an exchange traded fund (ETF) because the costs are low and you’d be hard-pressed to find an active fund manager with the expertise to consistently pick REITs over many years that will beat a REIT index. In fact, owning REITs through a mutual fund can cost you almost 50 percent of the yearly dividend you should receive, in manager fees. Therefore, instead of paying high fees, just buy an ETF that holds all of the REITs that matter. We recommend two SPDR Dow Jones ETFs in all of our portfolios to get REIT exposure: The SPDR Dow Jones REIT ETF (RWR) which indexes U.S. real estate and the SPDR Dow Jones International Real Estate ETF (RWX), which indexes international real estate.

For an annual fee of only 0.25 percent, RWR allows you to own the largest 81 REITs in the United States, including the largest American malls through Simon Malls, self-storage units at Public Storage Group, apartments, office buildings, and strip centers. Last year, investors received dividends of 3.61 percent.

For a fee of only 0.59 percent, RWX allows you to own a piece of companies like the Westfield Group in Australia with shopping centers worldwide and apartments and hotels held outside of the United States by Mitsui Fodusan. RWX paid a dividend of 3.46 percent last year.

Not all real estate assets serve the same purpose. Your personal residence should not be considered part of a proper real estate allocation because it is one highly concentrated holding largely for personal consumption. Owning raw land, real estate development projects, and hotels are not considered part of this asset class. These investments’ value relies upon the operating expertise of the principals, not the fundamentals of the real estate itself.

But owning REITs using an ETF gives you global exposure for a low cost and adds diversity to your portfolio. That’s why we  make sure you have them among your retirement assets.

A commodity is something for which there is demand, but which is supplied without any real difference across a given market. Commodities prices are determined as a function of their market as a whole. Generally, these are agricultural products, energy, gold and silver, and industrial metals.

Commodities can be an important hedge against inflation and devaluing currencies. The continuing strong growth in the global economy has created strong demand for a variety of raw materials, from oil to metals to lumber. That demand, in turn, puts upward pressure on the prices of those commodities. Because commodities prices usually rise when inflation is accelerating, they offer protection from the effects of inflation. Few assets benefit from rising inflation, particularly unexpected inflation.

Commodities have offered superior returns in the past, but they carry a higher risk than most other equity investments. However, by adding commodities to a portfolio of assets that are less volatile, you can actually decrease the overall portfolio risk. That’s because commodities have a low correlation to other asset classes.

With such volatility in mind, we add commodities as an asset class on our more aggressive equity-biased portfolios and only invest in commodities that are in permanent limited supply: energy and gold. Our portfolios include the iShares S&P Global Energy Sector (IXC) and SPDR Gold Trust (GLD).

The iShares fund gives you ownership of 86 energy companies worldwide-about half in the United States and half in countries like the U.K., Canada, and China. You’ll own the major companies that produce oil and gas, distribute oil and gas (Exxon, Chevron, Petrochina), as well as those that service the industry (Schlumberger), and others like Murphy Oil and Canadian Oil Sands Trust.

The profits generated from these businesses tend to directly correlate with the price of oil and gas, which is how you get exposure to the underlying commodity prices. Commodity ETFs are cheaper than many traditional commodity mutual funds. High-priced energy mutual funds like the Calvert Global Alternative Energy Fund (CGAEX), which charges annual fees of 1.85 percent; Fidelity Advisor Energy (FAGNX), which carries fees of 1.45 percent; or ICON Energy (ICENX), which charges 1.26 percent, all levy about three times the fees of IXC (0.48 percent) because investment pros are trying to pick the winners. But with IXC, you own a broader mix of companies and you will make more money over time just because of the savings in fees.

In the case of gold, silver, and other precious metals, before the advent of ETFs, investors had to own the physical metal. The GLD fund enables anyone to own a part of an index based on the physical metal stored in secure warehouses. Most mutual funds charge two to three times more than GLD’s 0.4 percent fee, like First Eagle Gold (FEGOX), which has annual fees of 1.21 percent, and Franklin Gold and Precious Metals (FKRCX), at 1.02 percent.

Most negative publicity surrounding ETFs focuses on commodity funds. They can be very dangerous for retirement-focused investors (rather than traders) because many of these ETFs are composed of baskets of commodity futures instead of physical commodities or actual companies. Long-term, passive investors should avoid some popular index products like the United States Oil Fund (USO), the United States Natural Gas Fund (UNG), iPath Dow Jones-UBS Commodity Index (DJP), and others that hold futures contracts. Investors including hedge-fund operator Michael Masters have been actively lobbying regulators to rid the market of these ETFs because they distort prices and artificially drive up prices. They are both damaging to the system and to the retirement investor’s portfolio.

If you want to stray beyond our model portfolios, consider ETFs like the Energy Select Sector SPDR (XLE), Oil Services HOLDRs (OIH), and iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ) that hold shares of real operating businesses. Also, buy commodity ETFs from only the three largest sponsors: Vanguard, iShares, and State Street (SPDR).

The original ETFs were simply baskets of stocks that represent a widely known index (like the S&P 500), wrapped into a single security that could be traded like any other stock on the exchange. For a variety of reasons, the financial industry has been manufacturing exotic ETFs at a feverous pace, stretching the meaning of the term “index,” and these ETFs are designed for active traders. For investors seeking a common sense, low-cost, globally diversified portfolio for retirement, there are only 20 or so ETFs that are needed to gain exposure to most asset classes, and the two mentioned earlier in this article should give you all the exposure you need to commodities.

Just because these countries like Brazil, India, Russia and China may be growing at record levels, stock prices don’t necessarily rise because their economies and governments are “emerging.” Shareholders benefit when companies grow after-tax profits. Governments of these countries might have onerous tax rates, state-sponsored price controls, securities laws that are not evolved or enforced, corruption, or risk of wars and violence, to mention a few common risks. All of these elements make these economies and their stock prices highly volatile.

Until a few years ago, the everyday investor had limited access to emerging markets, and when there was an alternative, he paid eight to 10 times more in fees than institutional and wealthy investors. Exchange-traded funds (ETFs) have truly democratized international investing. In the last six years, high-priced mutual funds averaging 1.5 percent in annual fees, like Morgan Stanley Emerging Markets (MGEMX), Lazard Emerging Markets (LZEMX), or T. Rowe Price Emerging Markets (PRMSX), have been challenged by superior, low-cost ETFs.

We recommend a single ETF for emerging market stocks: the Vanguard Emerging Markets ETF (symbol VWO).  If you owned $10,000 of VWO, you would own a piece of 833 stocks in more than 20 countries and for only $27 per year (a 0.27 percent expense ratio). Vanguard trades, rebalances, and maintains this basket of stocks. You won’t have to figure out whether China will do better than Russia, or whether you should be investing in Mexico or Thailand. You won’t have to decide whether Petroleo Brasileiro is better than China Mobile or Samsung-or pay an arm and a leg to an investment pro to figure this out. With VWO, you’ll own them all.

If you want some of your emerging market allocation to include specific countries or even continents, there are more specific ETFs. For country and region ETFs, iShares offers, for example: EWZ (Brazil), FXI (China), EWY (South Korea), or even all of Latin America (ILF). Expenses for these ETFs range from 0.5 percent to 0.8 percent in fees and are the equivalent of buying the S&P 500 for these countries. Some of our members for example, may use VWO for 80 percent of their emerging markets allocation and then pick two countries and put 5 percent in each of these.  They use the “I Want To Build It” path on the portfolio engine for doing this.

Investors who are new to ETF investing might have trouble making sense of out of all the hype and excitement. Don’t be fooled-most ETFs are irrelevant. In fact, many highly specialized ETFs are dangerous for most investors for a variety of reasons and appropriate for only the most active traders.  Read the NY Times article below to better understand why.

Even with more than 1,000 available ETFs, just 80 of them account for 80 percent of all money invested in ETFs and the top 20 account for 50 percent of all capital invested in ETFs. Generally, stick with well-known, easy-to-understand products. For example, those that are composed of very liquid securities to avoid hidden trading costs that accompany some smaller funds.

Our members tend not to be active traders. We just want a common-sense, low-cost, globally diversified portfolio for retirement.  For this purpose, there are only 20 or so ETFs that we use at MarketRiders to gain exposure to most asset classes.

“Finding good funds isn’t that hard; putting them together in an effective, low-maintenance, diversified portfolio is a lot more difficult. Too many investors have a collection of funds, rather than a strategic portfolio, where every fund has a role and every new addition is evaluated not just on its own merits, but on what it adds to the big picture.”

“Owning five or 10 mutual funds does not make an investor diversified if most of those issues come in one or two asset classes. Investors need more than a “good” fund; they need funds that enhance their holdings, diversify risk, bring additional asset classes into play and help the portfolio achieve their goals over time. ”

A proper asset allocation has funds that range from U.S., international and emerging market stocks to bond funds, treasury inflation protected bond funds, commodities and REITS.  Dependent on your level of risk, time frame and dollar investment, diversification can be achieved through building a cost effective index or ETF portfolio or choosing from a range of mutual funds that fall into these various asset classes.