First of all, I am not a professional stock picker. I am an independent investor who never studied business and never knew what he was doing in the stock market – except saying to myself, “I’m not paying some broker to do this for me and charge me on the front end, the back end, and every in and out in between.

Back to my story.

I used to think there were two options for my IRA: mutual funds and individual stocks. Bonds were out of the question. One of my friends told me, “Just say no to bonds.” And I figured bonds were for people 65 and over who had “retired” from trying to make enough money to retire.

I tried mutual funds for several years, and from 1994 – 2000 I did well. Looking back, it was a no lose environment. You could throw darts at the charts and hit winners. Janus, T. Rowe Price, Mutual Series – it didn’t matter!

But along the way, addiction set in. Those 20 – 30% profits were not enough. I got caught up in the exuberance of technology. I craved the highflying funds that were amped up on tech stocks. Well, around 2001, things went south and I lost big time.

Along the way, I had ventured into individual stocks. I reasoned,  “Stocks can go up 5% in one day. That’s more than a lot of mutual funds accomplish in a year. This is a no brainer.” I paid for the price for that, too. Clearly I did not have the genetic makeup to do well in the stock market.

Eventually, I came out of denial. It was time for recovery. No, I didn’t go to Betty Ford. I went to the sidelines. I dried out. Went into cash and some of the most boring big companies I could find. I thought dividends were better than nothing, so I tried parking in places like Procter & Gamble, AT&T, Boeing – you know the names. That was a step in my recovery. Then I had a financial awakening.

Around 2007 I learned about ETFs. “Wait. These are just index funds with a fancy name. I don’t have any trouble falling asleep. No Ambien in my medicine cabinet. Why would I go the route of index funds and commit my IRA to years of sloth and boredom?”

Then I learned about asset allocation, spreading my money around to various asset classes and periodically rebalancing. I found out about the law of compound returns and that it works if you stop trying to beat the market — lower fees and fewer mistakes! Is this really how it’s done?

I learned more about the ups and downs of ETFs – how owning a basket of stocks made sense. After all, market movements make money for managers, not individual stocks. That was an awakening for me. And I learned how markets moved in opposite directions. So if US stocks were on the outs, other indexes would probably be moving up.

So I tried this new approach, cautiously at first.  Just a few ETFs. Although I had never fretted over my IRA at 3 am, I noticed that I was not so preoccupied with my IRA. “Mad Money” was less interesting than the Lakers’ game. The Wall Street Journal was still interesting, but I was not reading the financial pages first. I wasn’t checking my portfolio two or three times a day.

Okay. My name is Miller and I’m a stockaholic.

I still own a few large stocks. I admit it –– I am not fully recovered. I still have a stash of McDonalds, Apple and a couple of other anonymous stocks.

But on the bright side, I am 90% in ETFs. I have US stocks: small, medium and large. Bonds: short, intermediate and long. Europe (bad for the moment), Asia, Canada. TIPS (which performed remarkably well last year) emerging markets, REITS, global real estate, gold and energy. I am diversified big time, with allocations appropriate for my risk tolerance, age and when I will retire.

I feel very comfortable with this arrangement. I don’t worry about the market. When I do check my portfolio, the “reds” are offset by “greens.” When one market is having a bad day, invariably the bonds or other markets pick up the slack. I’ve given up stocks for ETFs and gotten back my sanity.

While traders fret and squabble over the next best stock to buy or sell, smart portfolio managers focus on the big picture, spreading money across broad asset classes including U.S. stocks, foreign developed stocks, emerging market stocks, real estate, bonds, inflation-protected securities and sometimes commodities. Asset allocation is supposed to reduce risk within a portfolio by spreading bets across investments that move independently of one another. While one part of your portfolio zigs, the other zags, helping you make money (and preserve capital) in all environments.

Recent critics of asset allocation, however, have pointed out that due to factors such as globalization, many assets including stocks now move in lock step. This trend, they say, is illustrated in the 2008 crash when all sorts of assets fell in tandem, supposedly revealing that the benefits of diversification are ephemeral.

A quick look at the core stock classes in 2008 shows that pain was evenly spread across every major category with U.S. stocks down 36.2 percent, foreign developed down 43.4 percent, emerging market stocks 52.9 percent, and even the nontraditional classes of REITS and commodities hit with declines of 37.6 percent and 31.9 percent respectively. Where is the non-correlation in this asset allocation? These facts, the critics point out, prove that the asset allocation models of the past are now bunk and in need of a desperate overhaul. 2008 is said to have sounded the death knell for all of modern finance. In response, one idea that has gained traction among some managers is the notion of adding global currency as a new type of uncorrelated asset class.

Is Asset Allocation Dead?

Did Modern Portfolio Theory (asset allocation) really die in 2008? MPT does not guarantee that an investor will make money every year. It really does not even say that asset classes will always be uncorrelated. What it does say is that on average, over time, asset classes perform differently, and a diversified portfolio will exhibit less variation in returns than a portfolio with one asset class. This diversification should lower risk, help investors stay the course and achieve their goals over the long haul. Did this hold true?

A look at some diversified portfolios shows that it did. In 2008, bonds returned 5.2 percent. Disciplined investors who kept a strong allocation to bonds experienced much less pain during this historic downturn. A 50/50 split between bond and equity allocation would have reduced losses by more than half. Less pain means a lower likelihood that an investor will panic and abandon their planned course during turbulent times. But woe to those who did bail out. In the following year, U.S. stocks were up 25.2 percent, foreign stocks rallied 31.8 percent and emerging markets gained a whopping 82.6 percent.

More diversified portfolios declined less than the markets over 2008 giving diversified investors the courage to stay with their plan. Those who stayed the course reaped a robust reward the following year.

For a dead idea, MPT worked pretty well.

Should You Add Currencies into Your Mix?

Some MPT advocates suggest that currencies as the new answer for a truly diversified portfolio.

Take currency returns over the past year. While Mexican peso was is down 7.8 percent against the U.S. dollar, the Japanese yen was up 7.5 percent and the Swiss franc up 6.7 percent for the same period. A quick study of currencies demonstrates that they are in fact highly uncorrelated to stocks. Should we then conclude that they belong in your retirement portfolio?

For the average investor, the answer is no for two simple reasons:

1. A diversified portfolio of stocks and bonds already provides exposure to global currencies. Large U.S. multi-national corporations may trade in U.S. dollars, but they conduct business in foreign lands using foreign currencies. By default they are already affected by currency exchange rates. Furthermore, beware of holding investments that trade in currencies other than the dollar as you are exposing yourself to both the risk of the underlying companies as well as the foreign currency. That presents a lot of risk to understand, let alone manage.
2. Currency values are tied more to inflation speculation than economic growth. History demonstrates that economic growth does not necessarily result in a stronger currency. If you think corporate profits are hard to predict, try predicting inflation. It’s a daunting task best left to the pros.

Placing all your eggs in one basket remains as bad an idea today as it did forty years ago when the fathers of MPT first began suggesting diversification strategies. Although 2008 was a rough spot for all investors, those who stayed true to diversification through the tumult are smiling today.

In reality, cash isn’t trash, but cash generally doesn’t belong in long-term investment portfolios, unless you are an avid investor trying to beat the market. Here are several problems with having your retirement funds invested in cash.

Market timing doesn’t work. Many investors, when nervous about the market, “go to cash.”  And they wait it out until they “feel better about things.”  If you do this, you are timing the market, which means you believe that some little voice inside of you will tell you when to jump back in. Virtually all research proves that marketing timing doesn’t work. Most of the large market moves come within weeks after markets hit bottom. No one consistently can predict market bottoms—not even you.

It is shocking to look at long-term compounded returns when one tries to market time. In “Winning the Loser’s Game,” Charley Ellis points out that from 1980–2003, if you cut out the best 30 days (just half of 1 percent of the total days over those 23 years), you would have lost about 40 percent of the gains. Find the right balance of fixed income (bonds) and stocks that you can live with during dramatic market moves and stick it out, no matter what the market is doing.

Cash deteriorates over time. While you sit with cash, thinking that at least you aren’t losing money, realize that you are living with a false sense of security. Cash is eroded every day by inflation. Forget the government numbers; they are manipulated so the entitlements like Social Security don’t get out of control. We all know that steak dinners, vacations, gas, and cars are all more expensive than they were ten years ago. If real inflation is 3 percent, that cash you have sitting around for five years just lost about 15 percent of its value.

Is your cash safe? Where is the safest place for your cash? Hiding dollar bills in safety deposit boxes? If you leave cash in a bank account, the FDIC will guarantee your money for up to $250,000 per depositor per bank. Leave cash in a brokerage account and it is usually automatically invested in money market funds, which aren’t necessarily safe. Money market funds buy all kinds of bonds in order to generate a rate of return. Today, your money market fund probably has international bonds from Greece, Italy, and other countries that are in bad financial condition. The greatest fear from regulators is that a money market fund “breaks the buck,” which means that the value of each share falls below $1. At least 36 of the 100 largest money market funds had to be propped up in order to survive the financial crisis.

A safe way to hold cash is buying BIL, which is an exchange-traded fund (ETF). Owning BIL gives you a basket of U.S. treasuries that have a remaining maturity of one to three months and have $250 million or more of outstanding face value. The expense ratio of BIL is 0.15 percent, and since treasuries yield about as much, this fund runs at a breakeven. But you own treasuries, which are safer owning a money market fund. Holding BIL in a brokerage account like Schwab or Fidelity ensures that you can claim it as your property if the broker goes bust.

Cash for spending needs, and a rainy day fund is fine. But for your long-term investment portfolio that you are managing to fund your retirement, having cash is like driving with the brakes on.  The “safe” part of your portfolio should be invested in bonds, not cash.

Own stock markets, not stocks. Diversification means that you own enough stocks in a “market” so that no one stock can have any kind of major impact on your portfolio. Many brokers buy their clients 30 large companies and declare, “You’re diversified!” You know, all the usual big names. So how did that work out in 2008 when the largest U.S. companies, like General Motors, General Electric, Citibank and Bank of America, dominated a portfolio? Not so well. Do you subscribe to Netflix? Reed Hastings, its CEO, was often hailed as the next Steve Jobs until last July when Netflix began falling from $300 per share down to $75 this week¬—a loss of 75 percent. Big or small, individual companies blow up. And it happens suddenly. Want to minimize the risks that come from bad things happening to “good” companies? That means owning thousands of stocks.

Look inside most mutual funds and you’ll see 100 stocks, but for all the wrong reasons. To be a successful mutual fund manager, you must concentrate your bets on your favorite stocks. It’s the only way they have a shot at outperforming the market. But mutual funds with big Netflix positions are underperforming this year. So the typical mutual fund manager figures out over time that he can lose his job trying to be a hero and turns into a “closet indexer,” exchanging job security for any chance of beating his market (and justifying his fees).

That’s why we only recommend ETFs. They get you stock diversification and save you 80 percent in fees. Want to invest in small U.S. companies? Why pick a few good companies or hire a mutual fund manager? Just own one ETF and you’ll own literally hundreds of stocks. Netflix? Let it crash! You’ll never notice.

Spread it around. And consider this: There are other stock markets outside of the United States. Germans don’t obsess about our Dow. Half of all companies are outside of the United States. And world markets tend to move quite independently. Therein lies the second secret of diversification: What causes some to go up often causes others go down.

Yale professors studied money managers over 10 years to uncover the source of their portfolio performance. They found that 90 percent of the returns came from which markets they invested in. Less than 10 percent came from the individual stocks they bought and the timing of buying and selling investments. For example, if they owned small-cap stocks and that group of stocks did well that year, the performance of that market was the source of their success—not the specific small-cap stocks they had chosen.

Markets are the ingredients of successful diversification—and the more you have, the better. Diversifying into markets is kind of like creating a prized recipe. Garlic, lemon, oregano, and thyme are not too appetizing on their own. But when skillfully combined with a host of other ingredients, the results can be spectacular.

You want to own a host of diverse markets, and not just “safe” ones. Horseradish might be dangerous if consumed by itself, but as part of an overall recipe, it delivers positive results. The same goes for adding risky markets. Adding one or two to the mix can have a leavening effect that may actually reduce risk and volatility, while adding to overall performance.

U.S. stocks and stocks in Europe, Japan, and Australia tend to move independently from each other. So allocating money to all of these markets creates instant diversification. Emerging markets like China, Russia, India, Brazil also move to the beat of a different drummer. Bonds and real estate are even further afield from stocks, so adding these markets provides excellent diversification. Every year, some market wins and others lose, and no expert can predict the future. So the answer is simple: Own them all!

With the proper mix of markets—U.S. stocks of large and small companies, foreign developed countries, emerging markets, U.S. government bonds, real estate, and commodities (using ETFs for each of these markets)—you can consider yourself fully diversified. Now that’s a good salad!

Camped out in lower Manhattan for over a month, the protestors have spawned copycat events across the nation and abroad. While some identify with the frustration of youth trying to break into a job market that supplies a meager one job for every five seekers and a youth unemployment rate of 18 percent, others take issue with the movement’s anti-capitalist hysteria that seeks to penalize hard-working and productive Americans.

So what’s the fuss?

Behind all the brouhaha, however, there are some very real frustrations that all Americans, left and right, can identify with. How is it that politicians and bankers were in cahoots creating loose-money legislation and convoluted debt-backed securities that in turn were sold to the unsuspecting? How is it that trillions of dollars of government debt in the form of TARP, QE1, QE2, and beyond have been placed upon the shoulders of future generations to somehow resolve? How is it that some of the very bankers who were complicit in this disaster that destroyed the financial lives of millions of hard working citizens in turn made off like bandits? How is it that the Feds have embraced an inflationary exit strategy that threatens every hard-earned dollar you have saved and invested?

While protestors and non-protestors alike seek to place the blame for this travesty at the right doorsteps, these protests expose some deep assumptions about what is owed to us as citizens. These assumptions, once exposed, reveal some important lessons on investing as well.

Many of the protestors believe that they have a right to a well-paying job. And why should they not expect this basic opportunity? It has been the inalienable right of every American generation to date, spare the Great Depression, and therefore is deeply embedded in the warp and woof of the American mind. This assumption, however, is proving to be ill founded. While much of the third world can only dream of the minimum wage opportunities America affords, we have come to expect a middle-class life as a fait accompli for most, or at least the college educated.

The new reality is that the middle class is shrinking before our eyes as jobs flee to other nations whose middle classes are emerging. And gone the way of the shrinking middle class is the shrinking American Dream. Once assumed to be on tap for all hard-working citizens, this fount of prosperity and success seems to be running dry for many.

Who’s occupying your portfolio?

The new realities are just now beginning to sink in for many investors. You deserve nothing. Times have changed. You can’t just waltz your way into the American middle class anymore. You can’t rely on being a benefactor of past generations. The middle class is shrinking, and many who fail to work harder and invest smarter will be moved out while others in the world economy are invited in.

Additionally, you cannot look to Wall Street or the U.S. government to look after your retirement. It appears that Social Security will eventually fail. When it comes to The Street, we now know that many money managers will work to their own benefit, and if you happen to benefit along the way, you lucked out. If not, it’s your tough luck.

The critical question for today’s investor is, “Who is occupying my portfolio?” Is it an investment advisor? A fund manager? A small selection of equities and thus a small sample of fallible corporate directors and executives? When you look into the virtual room of your own portfolio, do you find yourself both present and vigilant? Sadly, many will find themselves strangely absent. Often it is because they are fearful of getting it wrong. Whether you are a do-it-yourself investor or an investor who delegates his funds to a professional, your presence in knowing what is in your portfolio, both in terms of fees and investment vehicles, and why is critical.

Additionally, at times such as these, the beauty of index investing is revealed. You can remove the advisor risk. You remove the money manager risk. You remove the individual corporate corruption risk.

You enjoy spreading your bets broadly across hundreds if not thousands of companies and are left to focus on what matters most in portfolio management—asset allocation. Now it is up to you to get globally allocated, remain disciplined with rebalancing, and behave like an adult managing something of great importance.

In the end, some may choose to set up camp in a tent, point a finger, and occupy Wall Street. I suggest you occupy your portfolio instead.

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.

That’s why sophisticated investors focus heavily on setting well-defined targets for how they allocate assets. To be an “asset allocator,” you play by different rules. Every portfolio needs six or seven core asset classes. Conventional wisdom says you should have at least 5 percent of your portfolio—but no more than 25 to 30 percent—in a core asset class. A core asset class has three primary characteristics:

Unique purpose. Like each instrument in a jazz band, each asset class plays a valuable “role” in different economic circumstances. U.S. treasuries protect you against economic meltdowns like 2008, but they lose value from inflation and slow down overall portfolio growth. Real estate hedges against inflation, provides a steady income stream, and can appreciate like stocks, but is not immune to economic cycles.

Stocks have outperformed every other asset class since 1928, but as we’ve seen, they can become overvalued, and suffer a decade of volatility and mediocre performance. And if America is growing slowly and countries like India and China are outperforming, investing in foreign stocks gives you a hedge.

Market-based returns. Core asset classes generate returns from a market, not the skill of an investment manager. For example, venture capital, private equity, and hedge funds derive their returns based upon who the manager is and how accomplished he is. Thus, these are not “core” asset classes.

Access. While many consider fine art an asset class, most everyday investors just can’t build a diversified portfolio of paintings, coins, and antiques. The asset class must be broad and deep enough to invest in. It must have a well-established marketplace, not made up of trendy concoctions promoted by Wall Street financial engineers. Thus, managed futures are not considered an asset class.

Non-core asset classes satisfy two of the three characteristics above. Examples would be venture capital, private equity, and hedge funds. Endowments and wealthy families have the resources and expertise to build portfolios consisting of 20 to 25 percent venture, hedge, or private equity funds. But most of us can’t do this. Some investors are sold on using a fund of funds to invest in these asset classes, but never consider issues such as: Can you trust the sponsor? Do they have conflicts of interest in their fee structures?

Moving to the “art” of asset allocation shows how this gets tricky. Here are a few examples:

Sectors. There are 10 basic economic sectors, and within each sector there are industries. Communications equipment and software are industries within the technology sector. Sectors are not asset classes, except the real estate sector, which is a core asset class. The U.S. real estate sector includes apartment buildings, warehouses, office buildings, and retail malls. It tends to behave different than the overall U.S. economy. Your house is not an allocation to real estate because its “returns” are mostly psychological and are limited to residential real estate in your town.

Styles. For 30 years, a great allocation strategy has been to parse out small public companies that have a “value” bent, and allocate to “small-cap value” stocks. This has added significant returns to a portfolio.

Commodities. In the last five years, allocating to commodities has become more acceptable for portfolios. But the debate rages on how to allocate between gold, precious metals, energy, and agricultural products?

Start thinking about your portfolio through this asset-allocation lens. You’ll start wondering what you have, and how it will work in the next market rise or meltdown. Now we’re talking!

There is one conspiracy however, worthy of your attention: Those on Wall Street don’t want you to know that their industry is a sham. For Wall Street, the hypnotic malaise they cast over the unknowing investor is nothing less than an $11 trillion dollar shell game. Their gambit makes the baccarat table at the Bellagio look like the neighborhood lemonade stand.

And like any good shell game, they keep the pea moving so you never really understand what just happened. Hideous mutual funds vanish into thin air leaving only winners so that fund companies can claim their funds are leaping tall indexes in a single bound. High fees slip out the back-end of your account while you lie in bed asleep at night, thinking they got your back. And how about that reporting? It’s so convoluted you would have to be a Nobel Laureate in economics to even know what you made—or lost—after fees and taxes in any given year. Did you know that it practically took an act of Congress to force 401(k) providers to tell employees in plain language how much they are paying in fees?

Speaking of Nobel Laureates, fortunately there are a few that have been paying attention: Harry M. Markowitz, Merton H. Miller, William F. Sharpe, and Nobel candidate Eugene Fama, not to mention other notable luminaries such Princeton professor and author Burton Malkiel, John Bogle the founder of Vanguard, and William Bernstein, the acerbic author and truth teller. If you haven’t yet familiarized yourselves with their findings, the time has come to do so. They’ve blown Wall Street’s cover in reams of research. Never mind that they conclusively demonstrate that low-cost indexing beats active management by a long shot, or that the buy, hold, and rebalance style of investing trumps the vein-popping practices of Jim Cramer and crew.

Worse yet, the good guys’ PR campaign is weak. While they stutter in the corner, Wall Street is rolling out eloquent waves of hypnotic media, which roll over us as in a tsunami of minute-long TV ads, billboard artistry, and heart-grabbing radio spots. Each makes you want to pull out your hanky, pick up the phone, and call your mom to say you love her.

Who cares about facts when Smith Barney speaks? Why not talk to Chuck? He sure seems like a nice guy. His name is Chuck. Have you ever met a mean Chuck? Or what about the TD Ameritrade guy, Sam Waterston. He played stalwart Jack McCoy on the NBC series “Law & Order.” He sure cracked the code there, so he’ll be the guy I can trust for my retirement, right?

Yes, Charles Schwab, TD Ameritrade, and others are excellent brokers. For a fair, low price you can have excellent trade execution and fulfillment, as well as receive tremendous customer service and online reporting. But watch your pocket if you go to these firms for investment advice. Chances are they will roll out the four-color glossy print, full-court press, and slip you right into some mutual funds from their supermarket that drip, drip, drip away your hard earned savings in high fees and underperformance.

Conspiracy theories are for the birds. Ours, however, isn’t one of them.  Facts are for the discerning. When it comes to Wall Street, the facts have been revealed by the best economic minds in the world. Are you listening?

Here’s why: Regular bonds depreciate in value if there is inflation. If you bought a $100,000 bond that pays 5 percent interest, you’d get your $5,000 per year in interest. But if in three years, bonds were paying 8 percent interest, the bond you owned would be worth less because investors would only have to buy a $62,500 bond to get the same $5,000 yearly payment.

TIPS protect you from inflation because the amount you get at maturity is adjusted for any inflation that occurred while you owned it. Think of TIPS as a bet with the government. If there is inflation, the government will take the Consumer Price Index and add that to the value of your bond. The coupon interest rate is constant, but it generates a different amount of interest when multiplied by the inflation-adjusted principal, which is how you are protected against inflation. Of course, if there is deflation, then your principal is reduced, but this is a rare economic circumstance. TIPS are offered in five-, 10-, and 30-year maturities.

Here’s how TIPS have performed so far: During the past five years, while there has been little to no inflation, TIPS have appreciated about 5.2 percent per year compared with an index of the total bond market which has returned 6.3 percent. But had there been rampant inflation during the past five years, you’d have been happier owning TIPS.

ETFs are the best way to own TIPS. You don’t have the hassle and cost of buying mutual funds, you can invest any amount that you wish, and you can buy shares for the cost of buying any stock through your online broker. Some investors go through the cumbersome process of purchasing TIPS directly from the U.S. Treasury, but your selection is limited.  Other investors flock to such funds as BlackRock’s Inflation Protected Bond, for which they pay 1.63 percent in fees-more than the interest paid on the bonds themselves!  Almost all funds that invest in TIPS hold about 30 to 33 bonds with a similar average duration of five years.

We’re all worried about QE2, government spending, and the diminishing value of our money when inflation kicks in.  MarketRiders portfolios give you a bet with the U.S. government so that it can pay you for inflation.

Add to Bogle’s comments radical yet opaque tax reform, QE2 efforts backfiring, and the 18 member deficit commission recommendations that we take a serious look at changing even the most sacrosanct Government institutions.  To make our point, we bring you a small sample of these topics from last week’s news.  As Yogi Berra once said:  “It’s tough to make predictions, especially about the future.”

Those of us with a nestegg to protect truly face unnerving times. We have a recurring nightmare that grabs us by the throat and drags us, though protesting, into a House of Horror-like carnival ride where we “retire” as an 82-year old Walmart greeter (no offense, but not a fate to which most of us aspire).

That’s why elite endowments, billionaire family offices and sophisticated investors focus on their global asset allocation strategy.  We bring their methodology to every investor and allow those who follow our lead, not only survive the madness, but find growth through our uncertain future.  Exposure to bonds, TIPS, emerging markets, foreign developed stocks, US large, mid and small cap equities, gold, and energy makes for a secure portfolio.

Stay the course with your allocations and enjoy peace-of-mind.