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

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

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

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

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

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

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

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

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!

If so, consult your favorite Wall Street broker, mutual fund, or become a stock picker yourself. Either way, within 20 years, say goodbye to 33 percent of your money and many of those dreams.

How could this be true? Most people confuse investing with gambling. Gamblers try to “beat the house.” Investors want to be “the house.” Imagine a casino in Las Vegas called World Markets Casino. World Markets offers all kinds of gaming options—blackjack, poker, roulette, craps, slots—along with great food, entertainment, and well-appointed rooms.

Guests have a lot of fun at World Markets—the excitement of gambling, the thrill of winning and losing. Some come in with various “systems” like statistical models and card counting systems to beat World Markets. Others talk to God. Poker players have their favorite seat.

There was a Grandma who dropped a quarter in a slot machine and won $250,000. Another person who had never played blackjack hit 21 in his first hand, made $50,000, and proposed and married his girlfriend all in one great evening.

It’s fun being at World Markets—just look at the posters and marketing brochures.

But most guests don’t just play, win, and leave. They continue playing and that’s what World Markets counts on. Like all casinos, it has special “house” odds. Sooner or later World Markets will win more money than it will lose due to human nature and statistics. Depending on the game and how wagers are placed, the casino earns up to a 35 percent commission from the winnings. It is impossible to do consistently, but guests come year after year to try to beat the house.

Suppose you buy stock and invest in the imaginary World Markets, Inc. (WMKTS). Investors care about one thing only: making money. They’re not concerned with having fun or discussing the night they had the “hot dice” at the craps table. They could care less if they ever hear the noise of a winning pull at a slot machine. They just want to know that they’ll make money year after year after year.

World Markets investors never know from night to night where they’ll make money. Some nights there’s a guest with a streak of luck on the craps table and the casino loses money there. But that same night, perhaps World Markets is making money on blackjack. On nights where guests are beating the house on all tables, the casino is still picking up antes from the poker tables, and making money on food, hotel rooms, and entertainment.

World Markets investors are “the house,” and ultimately those investors always make more money investing in the house than its guests who are trying to beat the house. It’s just a statistical fact.

But how is it that most people invest their own money as if they were gamblers at World Markets, instead of investors?

Most investors attempt to “beat the house” of world asset markets—U.S stocks, bonds, real estate, foreign stocks, emerging market stocks—by picking stocks on their own, giving their money to a broker who they believe is a good “stock picker,” or investing in a mutual fund that has a great track record.

But reams of studies from experts have confirmed that investors do worse than the house by the money they spend trying to beat it. Investors leave an average of 2 percent of their money every year at World Markets and pay more taxes because buying and selling stocks creates taxable income. Over time, due to mathematical laws such as compound returns, investors can lose 33 percent of their money over 20 years—just like a guest at World Markets Casino.

So how do you become an investor in World Markets instead of a gambler? Buy and hold a collection of exchange-traded funds (ETFs).

For every $100,000 invested, you’ll pay $200 in yearly fees, instead of $2,000 in fees to money managers, financial advisers, and broker commissions. You can invest like smart investors and endowments at Yale, Harvard, Princeton, and Stanford. You’ll never have to pick a stock or mutual fund again. And you can dial the risk levels of your portfolio up or down to whatever level you feel comfortable.

Be the house, not the guest.

Unfortunately, for every account of failure turned to success, there seems to be a deep reservoir of plain old ugly failure that leads to nowhere. Whether it is the ignominy of WebTV, the demise of the billion dollar USFL and XFL football leagues, or the more recent demise of Bear Stearns, Lehman Brothers, and IndyMac Bank, the choices are plentiful.

Particularly intriguing are failures from leaders that somehow find a way to snatch defeat from what otherwise appears to be the inevitable jaws of victory. In this year’s Indy 500, JR Hildebrand was one turn away from winning the prestigious race on his first try. Then, within sight of the checkered flag, the 23-year-old Californian made the ultimate rookie mistake. After successfully racing 499.8 miles, he slammed into the wall on the final turn, and Dan Wheldon drove past him to claim an improbable Indy 500 win.

Transforming inevitable success into ignominious failure is not reserved for corporations and sports stars. Possibly the saddest example may be found in the everyday retirement investor. Recent research by Michael Mauboussin, Columbia University professor, has revealed this in three simple numbers: 9, 7.5, and 6.

Nine percent is the annual historic growth of the S&P 500. The average investor could simply buy and hold the S&P 500 Index, go play golf, and look up in twenty years to see a nice achievement—9 percent returned year after year.

If, however, a retirement investor is not happy with this 9 percent success, he can hire a professional mutual fund manager to actively manage his money in an effort to beat the market. This brings us to our second number—7.5 percent, or the historic annual returns of actively managed mutual funds. The spread between the historic returns of the S&P 500 and the historic returns of actively managed mutual funds is 1.5 percent or the amount collected in fees by these Wall Street pros.

And now on to our final number: 6. According to Mauboussin’s findings, 6 percent is the actual historic return that everyday retirement investors in America achieve over time. What is the cause you may ask? The research reveals that this shocking underachievement is rooted in one simple ailment – efforts to time the market that go awry.

Poor market timing is rooted in the emotions of fear and greed—the two mortal sins of investing. While investment giants like Warren Buffet have long understood that the wise investor should “be fearful when others are greedy and be greedy when others are fearful,” the everyday investor underachieves by following the opposite principle.

When markets are flying high the everyday investor allows greed to kick in, leading these underperformers to hold on for more or even double down on their winning stocks. Unable to embrace the portfolio management discipline of trimming winning picks and buying losers, these investors set themselves up for the next big market adjustment. Eventually, the bubble bursts. When such market corrections hit, the everyday investor lets fear take the helm. Fear demands that the underperformer exit his position and rush to the safety of cash or bonds. In doing so, the cycle is complete, leaving the everyday investor with fewer retirement dollars and more sleepless nights.

If you prefer to worry more, sleep less and lose money, you now know how the everyday investor consistently achieves these aims. For those inclined towards more peaceful living and higher returns, low cost global diversification and disciplined rebalancing win the day.

And now just this week, FocusShares entered the game by launching 15 of the lowest cost ETFs ever offered in the public markets. (They also trade for free at Scottrade.) You can own the S&P 500 for 0.05 percent annually and no trading costs? What has Wall Street come to? Real value?

This revolution is good news for the everyday retirement investor. Gone are the days of having to sort through mutual fund brochures and Morningstar ratings. Now the big challenge is to analyze the free-trade allure to discover the best ETF building blocks worthy of their retirement dollars.

How should an investor decide which ETF to use? Should free trades trump expense ratios in making such selections? Here are a few things to consider when sorting through your ETF options:

Let purpose trump cost. The purpose an ETF serves in your asset allocation is more important than splitting hairs on cost. For instance, many of our MarketRiders portfolios concentrate on small-cap value stocks in a portfolio, even though these ETFs tend to have higher expense ratios. It is better to embrace the slight fee increase to achieve your desired asset allocation targets than to skip on the proper allocations in search of lower fees.

Understand the key areas of cost. Another important step in analyzing the value of commission-free ETFs is to understand the three main sources of ETF costs.

• Trading commissions. Most of the leading discount brokers charge around $8 to $10 a trade. If you have a globally diversified retirement account consisting of 14 ETFs and rebalance that account four times a year, you are making 56 trades. At $10 per trade, you are adding an annual $560 fee drag on your portfolio’s growth. For larger portfolios, these trading fees become less meaningful, but with smaller portfolios these fees can become significant. For example $560 in trading fees on a $500K portfolio represents less than .11 percent annually. On a portfolio of $50K, this annual burden dramatically increases to 1.12 percent.

• Fund expenses. While ETFs are run by sophisticated computers and have attractively low fund expense ratios, not all ETFs are created equal. When you look at the common indexes for U.S. large-cap stocks as supplied by the leading ETF providers, the fees vary slightly. Vanguard’s S&P 500 ETF (symbol VOO) costs 0.06 percent, while Schwab’s U.S. Large-Cap ETF (SCHX) costs 0.08 percent, State Street Bank’s SPDR S&P 500 (SPY) costs 0.09 percent, iShares S&P 500 Index (IVV) costs 0.09 percent, and now FocusShares Morningstar Large Cap ETF (FLG) costs 0.05 percent. A $100,000 investment in SPY versus FLG will differ a mere $40 annually because of their expense ratios. This is probably not a big reason to choose one ETF over another. The fund expense-ratio story can change, however, when you move into more specialized indexes. Take the emerging market index, for instance. While Vanguard offers MSCI Emerging Markets ETF (VWO) at 0.22 percent, Schwab offers its Emerging Markets Equity ETF (SCHE) at 0.25 percent, State Street offers SPDR S&P Emerging Markets (GMM) at 0.59 percent, and iShares offers MSCI Emerging Markets Index (EEM) at a whopping 0.69 percent. It is not surprising VWO just trumped the long standing emerging market leader, EEM, in assets under management, with an expense ratio differential of 0.46 percent and a great history of tracking the same index with excellence.

• Bid/ask spreads. While trading costs and expense ratios are easy for investors to understand, they often overlook a third cost: the bid/ask spread. The “ask” is the market price at which an ETF can be purchased and the “bid” is the market price at which an ETF can be sold. The bid/ask discussion can quickly become highly technical, but what investors need to know is that ETFs with lower volumes tend to have larger spreads, which essentially becomes another type of transaction cost. An ETF can trade for free, but because the ETF has poor volume, or weak market maker competition, the bid/ask spread can cost as much as the trading expense on larger transactions.

So what is the answer? Is it better to construct your retirement portfolio with commission-free ETFs offered at your broker, or to choose ETFs with the lowest expense ratios, or look at volumes and bid/ask spreads? Even with the three variables above, the answer becomes a very personal one that requires a bit of thought. How often will you trade? How much money is in your portfolio? Who’s your broker?

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?

In 1989 the first ETF—Index Participation Shares—came to the rescue. This S&P 500 proxy traded on the American Stock Exchange but was quickly gunned down by the Chicago Mercantile Exchange who quickly perceived the threat. It wasn’t until 1993 that the real gunslinger rode into town and changed the order of the fund industry forever.

The Good ETFs. In 1993, SPDR S&P 500 (symbol SPY) was launched on the New York Stock Exchange. Known as SPDRs or “Spiders,” the fund became the largest ETF in the world. In just over 15 years, there are now close to 1000 ETFs with more than $1 trillion in assets and growing at a breakneck pace close to 30 percent year-over-year.

But just when ETFs were winning the day, the ETF industry drifted from its sound mooring after the SEC approved a redefinition of the term “index” in 2003. Before then, ETFs were limited to holding baskets of stocks that tracked broad market indices such as the S&P 500 or MSCI EAFE for foreign developed country markets. After 2003, the SEC allowed ETF providers to create any set of guiding rules to form newfangled “indices.” This changed the definition of an index and allowed the Wall Street crowd to run wild creating the latest, greatest “index” de jour, cluttering the universe of good ETFs with a never-ending wave of convoluted, bad, and in some cases, downright ugly ETFs.

When trying to make sense of the world of ETFs, there are five simple principles that will guide you to the good and away from the bad and ugly:

• Index construction. Evaluate each ETF for the quality of the index it tracks and how well the provider replicates the given index’s performance over a long period of time. A bad index means a bad ETF.
• Low management fees. Be sure that you are paying rational management fees for the asset class under consideration. In general, the lower your fee the more you stand to make over time.
• High volumes. Quality ETFs often average billions of dollars in net assets where daily volume runs very high. This affords sufficient volume and liquidity so that the bid/ask spreads are narrow.
• Low turnover. More turnover means more taxable income. Look for turnover to be very low, about 10 percent for equity ETFs. Turnover is generally greater for bond ETFs because bonds mature and need to be continually replaced.
• Quality sponsors. Look to Vanguard, iShares, SPDRs, and Schwab ETFs for quality funds. These four firms account for close to 90 percent of all ETF assets and are highly regarded in the industry. Since Vanguard is a not-for-profit institution with the lowest fees in the industry, they tend to keep the other ETF providers “honest.”

The bad and the ugly ETFs. With new indexes popping up daily, the original “purity” of ETFs as suitable building blocks for asset allocation has been polluted. One of the most extreme examples of this is an ETF released in 2007 (now closed) by FocusShares, which developed an index of mid- and large-sized companies consisting of casinos, producers of beer and malt liquors, distillers, vintners, as well as cigarette manufacturers, and called it a “sin” index. Below is a list of potentially bad and ugly ETF categories to watch out for:

• Leveraged ETFs. While ProShares launched the first leveraged ETFs, a subsequent wave of leveraged products have followed. Strangely, these leveraged products have been known to sometimes severely miss the index over the long haul. Because daily returns are compounded, the returns of leveraged ETFs over periods longer than one day will likely differ in amount. And leverage is dangerous. Take for instance Direxion Daily Financial Bear 3X Shares (symbol FAZ), which plunged 95 percent, earning it the ignominious title of worst performing ETF in 2009.
• Actively-managed ETFs. It has been said that “if you can’t beat ‘em, join ‘em.” Well this seems to be the case with many active money managers that are now moving their practices from the mutual fund industry over to the ETF space. ETFs with a portfolio manager face the same challenges that mutual funds face—high fees and poor long-term performance records.
• Commodity ETFs. These hold futures contracts. Avoid ETFs that buy future contracts to achieve commodity exposure. Futures-based funds can fail to track their target index and are vulnerable to problems such as contango and backwardation. It is best to avoid such ETFs and stick with commodity ETFs that actually hold the underlying assets.

For you investment geeks who want a more comprehensive discussion on how we’ve used this to pick the ETFs for our MarketRiders portfolios, click here. When it comes to ETFs, invest in the good and avoid the bad and ugly. As tempting as the newfangled ETFs can be, the details reveal serious investment risks. By sticking with the five principles to finding good ETFs you can invest with confidence knowing that you have kept the bandit out of your portfolio.

The MarketRiders investment strategy is based upon research that show returns are predominantly determined by where your money is invested (your asset allocation).  Therefore, investors need a solid allocation plan for all the different types of available investments like US stocks, bonds, real estate, and foreign stocks.

Once you decide upon your allocations (our service helps you with this), ETFs are the building blocks to implement your plan.  ETFs are an amazing financial innovation because they give all investors access to the investment strategies of the most sophisticated investors.  They are made possible because of super computing technology that enables the instant building and adjustment of baskets of securities for very low fees.

Many ask us: “how is — ETF performing?” The question arises from what we call a “performance” mentality from years of conditioning from Wall Street.  If you have an ETF that mimics the S&P 500, then why ask how it did?  Just look at how the S&P 500 did.

We recommend ETFs that are the best “index” for a particular asset class.  In evaluating ETFs, we ask:  if we look back 20 years from today, will this particular ETF accurately capture the performance, after tax, of its index? Nearly all of our recommended portfolios include a Vanguard Emerging Markets ETF (VWO) that was up over 76% in 2009.  We aren’t geniuses for having recommended it.  It was up because the 28 emerging market economies (Brazil, Russia, India, China etc.) were up almost exactly 76% last year.  VWO did a good job mirroring this performance.

For MarketRiders we only require 20 ETFs to make our recommendations.  The ones we recommend, you can hold and rebalance for a very long period of time and achieve the best after tax returns.  Here are a few articles to dramatically increase your understanding of ETFs in 10 minutes or less.

Wall Street Journal:  How to Choose an Exchange-Traded Fund

Morningstar:  ETF Solutions

Index Universe:  What is the ETF Creation and Redemption Mechanism?

During Soviet era communism, citizen behavior was managed through a monopoly on information. It was the duty of the KGB to know all they could about information flow and to tightly control it. When Gorbachev became head of the Soviet Communist party, he recognized that a crisis confronted the rigid system of central planning in a world that was becoming increasingly competitive and in which information technology was changing economic and social realities. He persuaded the party elite that if socialism were to survive, economic restructuring (perestroika) would be necessary along with greater openness (glasnost) so that information could be better utilized. What he failed to realize, however, was that once his policy of glasnost took effect, there would be no turning back – people could see for themselves that the only way toward a normal life and improved living standards was to end communism and let markets deliver what consumers wanted rather than what the state dictated.

The fall of Soviet Communism is not unlike the current revolution that is rocking Wall Street. A glasnost-like spread of information is educating everyday investors on how Wall Street really works. Educated investors are using technology for cheap and effective investing and  lowering their fees, their risk and increasing their returns.  The once expensive stockbroker has been replaced by discount online brokerages that provide excellent trade execution. High cost and ineffective mutual funds are being upended by low-cost and tax efficient ETFs. Even investment advisers operating in expensive wood-paneled offices are now being replaced, along with their annual management fees, with unbiased and effective online services like MarketRiders.

This is all part of an information revolution that is rooted in the education of everyday investors.  Educating yourself on proven principles of money management is the cornerstone of investment success.  Fortunately, the erudite, technical finance textbooks are being translated into layman’s terms by kind authors who wish to bring the investing strategies of elite institutions and the world’s wealthiest families to every American.  In that spirit, we are celebrating the back-to-school season with our own selection of easy-to-read and engaging books on investing:

The Seeking Alpha ETF Investing Guide (Free): David Jackson, who founded Seeking Alpha, wrote a web-based book on ETF Investing that provides an interesting and compelling primer on the MarketRiders approach. It is free and easy to read.

Transparent Investing: What Your Broker Doesn’t Want You To Know (Free): Patrick Geddes is a good friend of the MarketRiders team and a leading expert on index investing. Co-founder and Chief Investment Officer of Aperio Group, and formerly the CFO and Director of Quantitative Research at Morningstar, Patrick offers this free downloadable book for any student who cares to learn how to best manage his retirement on his website “Transparent Investing.”  Click on “I Want the Full Story in More Detail” to download it.

The Elements of Investing: The Elements of Investing by Burt Malkiel and Charles Ellis is a timeless and easy to read guide that has a single-minded goal: to teach the principles of investing in the same manner that Professor William Strunk Jr. once taught composition to students at Harvard – using his classic little book, The Elements of Style.  The great thinking and teaching styles of Ellis and Malkiel make even the most academic concepts accessible and fun to read.

The Bogleheads’ Guide to Investing: The authors wrote this book as a service to all investors and all royalties from book sales are donated to charity.  As one reviewer states, The Bogleheads’ Guide is both a textbook for beginners and a refresher course for old hands. It blends elements of financial-planning primers like The Wealthy Barber with tips on why it pays to be cheap, a la The Millionaire Next Door.  We think you would love it!

All About Asset Allocation: Our good friend Rick Ferri is a serious thinker when it comes to retirement investing. Having learned the shenanigans of the Wall Street scene from the inside, Rick ventured out and built a leading retirement investment company called Portfolio Solutions that offers low-cost portfolio management rooted in modern portfolio theory. His book on asset allocation is a must read for any serious student of the index approach.