First, stock prices can be random, and it’s best to protect yourself. Don’t learn this the hard way: owning a portfolio of individual stocks that you think you “understand” is dangerous. BP has almost perfectly tracked the S&P 500 for years. Since April 26th, it has lost 50% of its value ($100 billion) due to a unpredictable event. Those who became comfortable with their stalwart, conservative bank and financial stocks (AIG, General Electric) learned about random events in 2008. Diversification means owning thousands of stocks and bonds in six or more asset classes using indexes and ETFs, not 20 stocks that you “like.”

Second, markets are mostly efficient. That’s because the smartest minds in the world are haggling over what companies are worth by trading shares all day. Buy a stock and 99% of the time, you are paying what it is worth. You aren’t getting a bargain, and you’re not going to “beat” the market.

Picture a gigantic computer, programmed with the best logic and infinite processing capacity, recalculating the value of all public companies every second of the day. On April 26 when the spill became front page news, BP dropped from $60 to $50 within days. The computer was busy digesting all the new data as daily shares traded spiked from 5 million to 156 million. By early June, as the spill worsened, the computer dropped BP below $30. Value investors estimated the spill’s damage against BP’s assets, cash flow, and litigation costs and bought from sellers who predicted bankruptcy. By June 10th, the computer was working overtime – 222 million shares were traded and BP closed near $31. But the computer was right: when a $20 billion settlement fund was announced a week later, BP’s price hardly budged.

Over a 10 – 30 year time horizon, you’re no match for the computer and neither is your financial adviser. It’ll out-think you. It’ll never get exhausted. Remember BP next time you are tempted to buy that stock you “like,” and then take that extra cash and rebalance your ETF portfolio.

Similarly with such market volatility in recent weeks, a few MarketRiders members have been asked to make some tough calls when, depending upon the portfolio, our rebalancing algorithms have alerted them to add to positions like, of all things, Europe. “Are you serious?” one member moaned. “Everyone knows Europe is blowing up. Why buy more now?”

Just like the man from the quote above, this member was having a tough time sticking with the plan. Sorry, but “buy low sell high” is tough to do. Successful investors must continually bet against the crowd, always with deep conviction, coupled with a tug of “unbelief.”

The MarketRiders system of buy, hold, rebalance is an investment approach, based upon solid research and unshakable facts. We can never remove all doubt, but we’ve harnessed the most scientifically verifiable investment approach known today. Rebalancing adds to returns and helps manage risk. You maintain your target allocations, and the risk level you set for yourself when you built your portfolio. Riding winners if fun, but what goes up, certainly comes down. Moving from religion to the casino: rebalancing forces you to “take money off the table” and add to losing bets that will be tomorrow’s winning ones.

It’s tough to maintain your allocations, and trimming a gold position or buying Europe while it is apparently swirling down the toilet is not easy. At moments like these, lean into the facts of the scientific research, push back your emotions and then rebalance your portfolio. You will be glad you did.

One new MarketRiders member asked the other day, why we recommended VGK, an index made up of the largest 482 stocks in 16 European countries when “everyone knows” that Europe is in trouble. VGK is down 18% this year, while the S&P is down 2%.

First, think of the thousands of investors all around the world, who deeply understand the economic circumstances of every country in Europe, focused every second on figuring out what every one of those 482 stocks are worth.  Is your opinion on VGK’s price better than theirs?  Second, VGK belongs in a globally diversified portfolio, because we care about the long term.  Europe will recover.  In 10 years, VGK’s price today will likely look cheap because those 482 companies will be more valuable.

Last summer when gold was $900 an ounce, a member declined to include it in his recommended portfolio because in his opinion “it was over valued.” Today its hitting $1200.

It’s during times like these, that you can really appreciate the calming logic of the MarketRiders investment methodology.  Trying to time and guess the market’s direction is futile for most mortals and investment professionals.  MarketRiders is based upon the idea that since we never know how an asset class will perform — we own them all at a very low cost, in proportion to our risk tolerance and we rebalance them as the markets shift.

Sounds easy to “buy low and sell high” doesn’t it?  When you receive a rebalancing alert to buy VGK, are you willing to buy more Europe?  We certainly hope so.

Is your asset allocation right?  This market provides you with a litmus test.  If you are feeling panic, then perhaps your stomach lining isn’t strong enough for amount of equities in your portfolio.  It may be time to consider whether you should increase your exposure to bonds and TIPs.  Our software makes it easy to do this by clicking on “Change Targets % or ETFs” on the dashboard.

Markets like these test you.  Stay the course and take a gut check.  With MarketRiders, your fees are rock bottom.  Follow your rebalancing alerts to take advantage of the market’s volatility, and if your allocation is right, you’ll be able to keep your mind off the stock market.

And of course, a plethora of explanations quickly followed. We heard about the “fat thumb” scenario describing a trader who, keying in the wrong trade, sold billions of shares instead of millions, triggered the collapse. One of the more interesting explanations is a truly bizarre account involving Nassim Taleb, trader and author of “The Black Swan,” a book that discusses high-impact, impossible-to-predict, and rare events that are beyond the realm of normal expectations.  According to this grand irony, Taleb’s fund placed a sizable S&P short that got the ball rolling for Thursday’s violent selling — creating his own “black swan.”  In the end, however, the 1000-point drop remains a mystery, and in the absence of any truly credible and complete explanation, market fear has been resurrected.

More important than understanding the cause of this event is understanding how you responded to it.  Did you yawn, or did you freak? For those who live by the market’s vicissitudes, May 6th was an apoplectic ride on a terrifying roller coaster. With each swing of the market, such investors sit glued to the ticker, at one moment thrilled, the next gripped by dread. For those of us who are MarketRiders, such days produce a yawn.

With our investments sheltered by a distant time horizon, low fees and smart diversification, we are free to go about the more important business of our lives. Some investors prefer drama. We prefer peace-of-mind.

But after 50 years old, we start waking up at night worrying, “Will I ever be able to stop working one day?”  Taking action without the benefit of 20-30 years of time on your side is like swearing off steaks as you’re being wheeled into the operating room for a triple bypass:  too little, too late.

Since April 15th was the deadline for making yearly IRA contribution, the finance writers were dolling out plenty of advice and ideas on retirement. Neil Weinberg of Forbes guides us how to figure out one’s asset allocation in his article Asset Allocation -The Key to Building A Big Nest Egg.  His advice is very useful and his guidelines are similar to how MarketRiders online portfolio manager software works.  Other articles worth reading are found in the Wall Street Journal and the Washington Post, they both feature articles on ways to figure out how much you’ll need to retire.

Saving is the first step.  Smart investing is the second.  A recent MarketRiders study on how fees can devastate an IRA portfolio has been generating a lot of interest.  The study reviews three scenarios showing how a 35 year old can diligently contribute $4000 per year to his IRA, but end up losing $1 – $1.5 million over 40 years, just because of fees.

After you read this week’s articles, please fund your IRA this year.  You’ll be glad you did!

Retirement Planning

They all have numerous components worth serious consideration. 

When it comes to investing,  “it isn’t enough to simply tend to your 401(k) and pray for Social Security.”  Make sure you challenge your current investment portfolio.  Should you really be invested in high cost mutual funds, or can you accomplish similar returns and diversification with comparable risk at a lower cost with index funds or exchange traded funds (ETFs)?  Challenge your current asset allocation and make sure it really mirrors your financial needs and desires for retirement as well as your tolerance for risk.  Question whether you are getting good value from your investment adviser for the cost you are outlaying.  Know that there are tools out there to guide and help you do-it-yourself at a much lower cost.

“Your retirement plan probably looks different than it did a few years ago. Yet things aren’t as awful as you might imagine. We’ve turned the corner on some key financial fronts, and it’s both safe and smart to start thinking about your golden years again.”

The study concludes that “The decline in retirement preparations could be directly related to companies no longer offering 401(k) matching, layoffs and the housing crisis. Lack of retirement planning forces many to work until they are much older.”

To that I say you need to start investing in the market by establishing your own individual retirement account (IRA).  Look to start investing in low cost investment vehicles such as exchange traded funds (ETFs). Not only will you be able to save on fees, that in turn stay in your own portfolio and compound over time, but also they allow you to be in the market with less risk than individual stocks. ETFs are a basket of stocks or bonds that track an index, not individual equities, and thus are inherently less risky. I also suggest utilizing tools offered by marketriders.com to get guidance on how to build a portfolio with an asset allocation that suits your financial needs and offers you diversification.

I realize 2009 was a tough year, but know that any amount you can add to your retirement portfolio today will have greater benefits to you in the future.

“The turbulent economy of the last two years has left accounts across the nation like beaches after a coastal storm — severely eroded. Clients in their mid- to late 60s are asking, ‘Can I still afford to retire?’ The answer depends on a person or couple’s assets, lifestyle and retirement goals. While retirement may still be feasible for the affluent, those less well-off or younger people whose modest portfolios have been battered need time to rebuild.”

So as you decide on your IRA investment strategy, consider an investment portfolio that provides diversification with an asset allocation fit to your financial goals and risk tolerance.  To protect your nest egg from further erosion, also be certain to entertain low cost investment vehicles such as exchange traded funds (ETFs) and index funds.  This coupled with a warm glass of milk should help you sleep more soundly at night!

Think of the conversations that occur behind closed doors at the White House, corporate boardrooms or U.S. Central Command. We all understand that there are elements of those conversations that are deemed, for whatever reason, unsuitable for public consumption. They are tucked into the classified file, sworn to secrecy and solemn oaths. But every now and again, some of the untold story leaks out – finds its way to the common person. Sometimes the information is so unbelievable, that it is marginalized as ridiculous. Other times it is corroborated with such credibility that all we are left with slack jaws and nodding heads.

Below are three brief but shocking behind-closed-doors accounts about Wall Street and investing that left me stunned.

CEO of a Top Publically Traded Tech Company: Having participated in the Silicon Valley for years and sat on the board of Baidu, I come into contact with a broad network of technology leaders and professionals. Recently, I became part of a stunning conversation with one of the top executives in The Valley.  This individual, while surprising humble, is also profoundly wealthy. For years he used the “top” wealth managers who have access to elite money managers who in turn “outperform” the market to justify their fees. After years of high cost and poor performance and tens of millions lost, this executive was seriously underwhelmed. He pulled his money out, embraced a simple indexing strategy and global diversifications. It takes him only a few hours a year to manage the money himself. He save hundreds of thousands if annual fees and achieves a much better result. Why don’t we ever see that ad during Wimbledon?

Former Banking Firm Top 500 Producer: Imagine being an investment advisor who has built a dream business – over $1B in assets under management (AUM) and a coveted Chairman’s Club member. Making just over 1% a year on AUM, this wealth manager was grossing over $10MM annually in fees. Unfortunately, he had a huge problem – he still had a conscious. The more he study active money management, the more he learned that it not only failed to add value to his customers, but was in fact deleterious.  When he approached management about this problem and sought an indexing approach, he was run out of town. After a legal battle and negotiations, the firm and the manager struck a settlement. He left his customers in the hands of the banking firm and he had to move on. I guess someone is now making money “the old fashion way – earning it.”

$750 An Hour Tax Attorney to the Uber-Wealthy: I was once invited into a private conversation with the uber-wealthy about tax management. The strategy was architected by top legal minds in the country. Profoundly expensive to set-up and maintain, this apparently legal and sophisticated offshore strategy would result in profound tax reduction. Imagine most of your wealth free to compound without tax consequence. These uber-wealthy could invest in the most sophisticated and elite products. When I asked the attorney what the majority of his clients were investing in, he just snickered. Over 60% of their dollars were dedicated to simple and diversified indexing strategies. There was no Wall Street, no active managers, or Jim Cramers – just hundreds of millions, even billions, going into a simple, proven approach used by those in the know.

I hope you are doing the same.

For years, my husband and I have been watching her on the TODAY Show and every time we feel as though we walk away more financially savvy than we were before watching her segment.  Oftentimes, it seems that financial experts speak in a different tongue as they make the subject so complicated and difficult to relate to.  But once again, a recent article Retirement Investing: Tips for Creating the Proper Asset Allocation by Jean Chatzky, hits the nail on the head about how best to tackle retirement planning.

“No matter what retirement savings vehicle you’re using – 401(k), Roth IRA, Traditional IRA, or some combination of the three – once you find the money to stash away, you can easily set up automatic contributions each month. By doing so, the money is whisked out of your bank account before you ever have a chance to spend it. But that doesn’t mean your role in the retirement savings game is over.”  This is where one’s role in their investing appears to be more daunting.  But as she comments, “you’ll need to weigh a few factors about yourself – including your age, your risk tolerance, and when you plan to retire – and then figure out how you are going to spread your money across the different investment categories. This is called an asset allocation.”    Whether you choose to hire an investment adviser to help you in this effort, or look to do-it-yourself portfolio management tools to assist you — such as one from MarketRiders Inc. – it is a step that must be taken for smart retirement investing.  Read her recent article and you too will feel more financially savvy, not to mention better armed to tackle your retirement investing strategy.