You have diversified your portfolio to reduce risk and increase your likelihood of a good retirement. Congratulations! By focusing your attention on what matters most—finding the right mix of stocks, bonds, and cash—and keeping your allocation on target through steel-veined rebalancing, you have elevated your portfolio into the top 10 percent and are enjoying the company of the top endowments and of wealthy families. You are no longer the stock market’s dog taking its daily beating.

As you have grown in sophistication, you have also become aware that the big players use alternative investment vehicles—hedge funds, private equity deals, absolute return strategies, and venture capital—to further increase diversification and elevate returns.

Take a look at Yale’s endowment manager David Swensen. One of the leading evangelists for low-cost index investing across stocks, bonds, and cash, Swensen follows a different path for the endowment he manages. In his portfolio you will find a hefty allocation to alternatives, namely 50.6 percent across absolute return strategies and private equity as of 2010.

Why does Swensen make so much room for alternative investments? There are several reasons. One such rationale is that alternatives provide real diversification within the university’s portfolio. While equities from the United States, foreign developed countries, and emerging markets sometimes seem to move in lockstep, alternative investments are more likely to zig when corporate stocks zag. That accomplishes a big goal of diversification. Another reason is something called risk-adjusted returns. For just a little more risk, Yale is able to increase its returns over a ten-year period by approximately 4 percent annually. That’s a bet they want to take.

So to truly follow the endowment model, you would think that alternatives should be represented in your portfolio as well. Additionally, in recent years, a new class of mutual funds has emerged, giving regular investors access to alternative deals that they were once locked out of. Is it time for you to board the alternative investment train?

Probably not. Here are four reasons the average guy should be cautious:

Qualification. The SEC has set rules about who can participate in alternative investments. Because alternative vehicles do not fall under the same SEC regulations and oversight as public stocks, and because there is a history of volatility and increased risk, the rules now state that to participate, you must be an accredited investor who has earned $200,000 annually for the past three years or who has a net worth, excluding home equity, of $1 million or more. The assumption is that a person with those assets is more sophisticated and more able to assess and survive the risks involved. And if you are not bringing a minimum of $500,000 to the game, there is no need to apply. Most funds set that amount as the minim hurdle for participation. Alternative investment mutual funds, however, have removed qualification barriers by allowing average investors the opportunity to pool their funds and participate.

Quality. Access is one thing, but quality is the bigger issue when it comes to alternatives. It doesn’t help to gain access to alternatives if you’re buying into the leftovers and walking dead, as the VC world calls them. Access to the best managers and funds is highly sought after, and a serious competition rages between endowments and wealth managers commanding billions of dollars of assets. Your little alternative mutual fund is the yapping Chihuahua that is fighting for his chance at the dog bowl while the pit bulls ravish the meal.

Fees. Even if you do luck out and find your way into a quality alternative fund, beware of the fee structure. While the institutional investors are able to knock down fees, the average Joe can expect to pay a 2 percent annual management fee and another 20 percent on all profits before he gets money out. Under the mutual fund model, add another onerous layer of management fees, usually around 2 percent annually, plus marketing fees and sometimes additional loads. Your underlying investments better include the next Facebook if you expect to see stellar returns.

Visibility and transparency. Finally, there is the issue of the visibility of your investments and the transparency of management. If David Swensen calls up ACME Enterprises to get an update on his European private equity holdings, his call will be taken and the discussion will be deep and wide. If you call your mutual fund provider to find out about how your investment in XZY Ventures is going, you will be put on hold until you go away. You have no shot of really understanding anything that is happening with your investment dollars short of what the mutual fund managers provide in their polished quarterly reports. And if the house starts to burn, count on being the last dog out the doggie door.

Big, smart money has ways of accessing alternative deals the average guy has a hard time understanding, let alone selecting. Alternative investment mutual funds can provide access to some high-priced leftovers. Smart access to alternatives comes in the form of index funds pointed at real estate through U.S. and international REITs and commodities in the form of U.S. and global energy and precious metals investments. These alternatives technically fall outside the typical stock/bond mix and provide real diversification via low-cost and reasonably transparent investments. Include these alternatives in your portfolio mix. If you try to play in the alternative world with the big dogs, you’re likely to end up with leftover dog meat that will leave you growling.

Volatility was up in 2011, and brought out all of the “forecasters” in droves predicting which way the markets will blow.  Most have been wrong.  Bill Gross, who runs the largest bond fund in the world bet against US Treasuries, which was the top performer in 2011.  Famed investor Meredith Whitney predicted the demise of municipal bonds.  Following her advice would have been devastating as munis rallied after her “insights.”  Hedge funds that focused on picking stocks were down 7% in 2011 with a Dow up 5%.

One of our members asked, why we recommended Vanguard’s Exchange Traded Fund  VGK an index made up of the largest 482 stocks in 16 European countries when “everyone knows” that Europe is in trouble. VGK was down nearly 18% last year, while the S&P was flat.

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 companies 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.  When CNBC says “Europe” remember these are real global businesses making money, employing millions of workers.

A year ago, when TIPS were selling at a high price, one of our members declined to include it in his recommended portfolio because in his opinion “it was over valued.” TIPs were up over 12% last year.

Trying to time and guess the market’s direction is futile for most mortals and investment professionals.  It’s during times like these, that you can really appreciate the calming logic of a simple and disciplined asset allocation investment methodology.  Since we never know how one particular asset class will perform –own them all at a very low cost, in proportion to our risk tolerance.  Then rebalance them as the markets shift.

Sounds easy to “buy low and sell high” doesn’t it?  Would you buy more Europe now if you were under-allocated?  We certainly hope so.  Is your asset allocation right?  This market provides you with a litmus test.  If you have been feeling panic lately, 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.

Markets like these test you.  Stay the course and take a gut check.  Keep rebalancing and make the market’s volatility your friend. If your allocation is right, you’ll be able to keep your mind off the stock market, keep CNBC off and focus on the rest of your life.

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.

Any while many investors had previously never heard of MF Global, the firm’s failure led to an approximately 10 percent single-day hit to financial stocks. A better understanding of the MF Global debacle may help you exorcise the goblins that may be lurking in your investments.

Indecent exposure

Apart from the alleged $700 million in missing money and illegal activity, MF Global’s core investment problem was its gun-slinging investment approach towards the sovereign debt of Portugal, Ireland, Italy, Greece, and Spain (better known as PIIGS).

Upon filing for Chapter 11 bankruptcy Monday, margin calls of some $6.3 billion in Eurozone debt was revealed. That’s five times the size of MF Global’s equity. MF Global placed a very large bet on PIIGS and in the end, it got stuck in the mud. Ironically, MF Global’s homepage mission statement reads: “Working relentlessly to bring our clients superior market access, hardworking insights and powerful trading and hedging solutions.” If accusations of wrongdoing prove true, they apparently left out: illegal use of funds, shortcuts, and daredevil investing. Powerful indeed!

Just when you begin to feel a bit of relief that your retirement dollars aren’t with that firm, a bit of research reveals that U.S. bank exposure to PIIGS and Eurozone debt is substantial. According to a recent report by the Congressional Research Service, nearly 5 percent of total U.S. banking assets are in PIIGS. That may mean your institution is silently at risk as well. Add to the sobering $641 billion in PIIGS exposure by U.S. banks $1.2 trillion in exposure to German and French banks and you are left with significant risks to U.S. banking infrastructure in the event that the Eurozone goes caput.

This brings us back to our investment primer—be a hawk at diversifying assets and managing risk. Warren Buffett’s famous maxim for investing is simple: “Rule One: Never Lose Money. Rule Two: Never Forget Rule One.” In the case of MF Global, rule number one was long forgotten in favor of leaning dangerously out to grab the brass ring. How does your investment portfolio look when it comes to risk management? Do you have global exposure to six or seven asset classes, or are your investments all stuffed into one asset class in a reach for high returns?

Will the big bad wolf blow your house down?

Worse yet, initial statements seem to indicate that MF Global had more than poor asset allocation to worry about. According to a board member at the Greenwich, Connecticut, firm Interactive Brokers, there appears to be at least $700 million missing from client accounts. Interactive Brokers was pursing a possible acquisition of MF Global when the alleged wrongdoing emerged.

Broker-dealers are charged with keeping client funds separate from company dollars, but according to testimony, MF Global used client money unbeknownst to clients for its own internal investing. How can an investor know if his broker is behaving similarly? The obvious answer is one can’t. Surely, however, placing funds under the care of one of the leading discount brokers that is less inclined to get involved in more esoteric investment banking activities is a start.

How safe is my money?

Moody’s downgraded MF Global last week. This downgrade was met by MF Global’s CEO publically minimizing the rating adjustment. In fact, while MF Global was swirling the toilet, its marketing arm was simultaneously sending out letters to clients reassuring them of the firm’s strength. Once calamity struck, clients who called MF Global on Monday were met with nothing more than a voice recording.

When a similar catastrophe strikes your broker, how do you know your money is protected? Investors may be aware of the Securities Investors Protection Corporation, a government-created entity which provides account insurance and oversees liquidation proceedings. Not all accounts have SIPC protection, so the matter of first importance is to confirm that your account is covered.

If your dollars are in fact covered by SIPC, you must understand the SIPC is not a guarantee that you will receive all lost funds. Unlike the secure promise of FDIC bank account insurance, SIPC coverage must be applied for within a designated deadline and may not cover all forms of fraud. It is the responsibility of the investor to provide the appropriate proof of assets and documentation with his application.

Kevin Bell from SIPC was asked about the process. “What customers ask is, ‘When am I getting my money?’” said Mr. Bell. “You tell them to sit tight, and start gathering their information so they can file claims.”

Some investors thought they had their money securely tucked away in a credible investment house. This week they awoke to their own nightmare to discover that their money was locked away in a house of horrors. Take some time to do a bit of research and vet your broker. Find out what their PIIGS exposure actually is. See if they in fact have high ratings from the ratings agencies. And keep a copy of your records close at hand.

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.

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.

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?

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.

Considerable portions of these reserves have courageously found their way from the sidelines and into the market over the past 18 months. Still, many investors remain skeptical. To their consternation, these befuddled bystanders have witnessed the Dow Jones industrial average march steadily past 8,000, through 9,000, then 10,000, 11,000, and finally the 12,000 barriers.

For such investors, each new milestone has been both painful to witness as well as hard to believe. The market’s growth appears unsustainable and tenuous at best. The unemployment numbers are dismal. The backlog of bad debt still awaiting destruction is formidable. An impressive litany of other very real national and international economic concerns leave these would-be stockholders frozen in place, unable to make any investment decision. These investors remain motionless, paralyzed by uncertainty, unable to do anything more than simply watch the markets fade away in the distance while they stand holding their diminishing bag of cash.

How can investors suffering from paralysis of analysis break free and once again participate in the markets? Here are three approaches to consider:

Jump into the market. Jumping into the markets with a Dow average north of 12,000 may feel akin to jumping into Lake Michigan for the annual Polar Bear Plunge—in other words, crazy. But before you write off the idea, step back and consider the possible wisdom of this approach.

Wading into these frigid waters becomes more rational if you do so clothed in the warmth of a truly globally diversified portfolio. By adding U.S., foreign developed and emerging market stocks, commodities, U.S. treasuries, foreign and corporate debt, Treasury Inflation-Protected Securities (TIPS), and more to your portfolio, you stand largely protected from your worst fears. Additionally, disciplined rebalancing will allow you to do what few investors have the true grit to pull off—trim winners and buy losers, thereby reducing risk and positioning your portfolio for future market shifts.

Finally, an investor should not lose sight of his time horizon. If a retirement investor has a time horizon of 10 years or more, a 10 percent downside move in the markets will not ultimately adversely affect that investor’s retirement dreams. Eventually, markets will sort themselves out and offer rewards to those who participate in their efforts.

Dollar-cost average into the market. Jumping into the markets isn’t for everyone. That is why advisers have recommended the practice of dollar-cost averaging for years. The idea behind dollar-cost averaging is that the investor will purchase fewer shares when prices are high but more when prices are low by investing a fixed amount of money at regular intervals. This will eventually drive the average cost per share down to lower levels. Dollar-cost averaging is a time-honored investment technique and it helps prevent investors from investing large amounts of money at the wrong time.

The challenge with dollar-cost averaging is the potential negative effects of transaction costs related to each trade. These effects can largely be minimized, however, if you employ the many quality exchange-traded funds that trade for free at brokers such as Charles Schwab, Fidelity, and Vanguard. The approach does require discipline and a predetermined plan, but can prove to be an effective cure for investor paralysis.

“Put” your way into the market. Selling puts to move into a stock position is a sophisticated trading technique requiring education and diligence. If used wisely, however, selling puts can be an effective way to move from the sidelines and into a stock you are already planning to buy.

When you sell a naked put, someone is paying you to enter into a stock position you already intend to own. If the put expires worthless and fails to hit your strike price, you simply collect on the value of the put, allowing you to pocket the profit and write a new put for the future. If the stock hits your strike price, you then own the stock you intended to buy all along, but were paid a premium along the way in the form of the put. If the market crashes and your stock goes dramatically down, you are forced into the stock at your strike price and will lose money, but only money you would have also lost by simply buying the stock outright.

This sophisticated trading technique is risky, but for the educated and astute, it can help you move from the sidelines back into the market. It is extremely important to do your research before employing this technique.

Breaking free of the paralysis of analysis is essential if an investor wants to enter and benefit from the eventual growth of economies and markets. A globally diversified and rebalanced portfolio will provide protection and participation in the market’s growth. Whether you jump in, wade in, or get clever with puts, getting in is a good thing for long-term investors.