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.

And, as usual, the average retirement investor feels caught off balance and a few steps behind the curve. What is the ordinary investor to do? It does feel a bit like 2008 again, doesn’t it? Is it too late to take a cue from the pros, pull up stakes on a long-term investment mentality and find a nearby bunker to hunker down in with a bag of bonds now returning less than the rate of inflation?

At times like these, simple positive thinking doesn’t seem to extract the thorn of worry from the back of the investor’s mind. As much as he conjures up Bobby McFerrin’s “Don’t Worry Be Happy” chorus or hums a bar of “Hakuna Matata,” the worry seem to still creep in at unexpected moments like a terrible and relentless rot.

Investment anxiety, however, can be tamed. They key is having a clear understanding of those things that should and should not be on your list of worries. Let’s begin with what not to worry about – the direction of the markets.

I Don’t Know and I Don’t Care

The famous financial columnist, Jason Zwieg, once wrote powerfully about how index investing liberates the investor from the anxieties of trying to predict market movements. His words from 2001 are as relevant today as they were then:

Indexing enables you to say seven magic words: “I don’t know, and I don’t care.”

Will value stocks do better than growth stocks? I don’t know, and I don’t care – my index fund owns both. Will health care stocks be the best bet for the next 20 years? I don’t know, and I don’t care – my index fund owns them. What’s the next Microsoft? I don’t know, and I don’t care – as soon as it’s big enough to own, my index fund will have it, and I’ll go along for the ride.

Indexing enables me to say, “I don’t know, and I don’t care,” liberating me from the feeling that I need to forecast what the market is about to do. That gives me more time and mental energy for the important things in life, like playing with my kids and working in my garden.

When it comes to worrying, one should only worry about what he or she can control. Although countless have tried to control the public markets through worry filled hours of mental consternation and sleepless nights, markets rarely, if ever, obey. Therefore, the current vagaries of the market need to be ignored in exchange for the science of long-range planning based on hard, cold investment facts. It may seem like the world is falling into a hole, but investment science indicates otherwise.

Those who have the courage to ride the markets through the ups and downs, holding their course over decades, will be handsomely rewarded.

I Do Know and I Do, In Fact, Care

There are some aspects of investing that, in fact, are worthy of serious retirement investor’s attention. Two elements within the intelligent investor’s control are asset allocation and investment costs.

While millions of Americans tune into Jim Cramer’s Mad Money to watch him race about with his shrieks, squeaks and squeals, proclaiming what stock to buy or sell, the intelligent investor understands that the research is conclusive – 90% of investment returns are rooted in asset allocation, not stock picking. Therefore, the intelligent investor focuses his energy on identifying six or seven asset classes, with as little correlation as possible – U.S. equities, foreign developed stocks, emerging markets, commodities like gold and energy, real estate investment trusts, inflation-protected Treasuries, bonds and possibly more.

The investor then works carefully to identify, based on his risk tolerance, time horizon and other factors, the appropriate mix of theses assets classes for his portfolio. Once the portfolio is constructed, the investor rigorously maintains his allocations over the years, making adjustments only when his needs dictate a need for investment policy changes – not because Cramer bonked his bonker or because of any other market madness.

Finally, the intelligent investor overcomes investment anxiety by driving all unnecessary investment costs far from his portfolio. While market movements cannot be controlled, costs can be. Therefore, the investor makes sure to use low cost index funds and ETFs as essential building blocks for a diversified portfolio. Instead of paying one to one-and-a-half points for mutual funds the intelligent investor is able to achieve global diversification for around one fifth of one percent annually.

Additionally, by removing all unnecessary intermediaries that stand between the investor and his money, agency risk is dramatically reduced. The investor no longer needs to fret that some money manager is going to go AWOL with his retirement dollars or that he is going to become an unwilling participant in the next episode of the ongoing Wall Street saga of investor meets crook.

Like Wilkie Collins, the famous English novelist, once said, “Peace rules the day when reason rules the mind.” By accepting your inability to control or predict the markets, and embracing your ability to drive down fees and construct wise allocations, you too can shirk Wall Street madness and say goodbye to investment anxiety.

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?

How products, people, or ideas move from unknown to “cool” and back again was explored by Malcolm Gladwell, in his book The Tipping Point: How Little Things Can Make A Big Difference.  He offers a unique premise whereby people he calls Connectors define what is cool for Mavens who in turn popularize the new fad with Salesmen, who take the message to the world.  By this process, products, services, or fads can suddenly be thrust from obscurity to cool.

Take, for example, Crocs sandals that became the rage with pro-athletes and movie stars. These cultural icons shamelessly donned these strange pink rubber slippers. In the blink of an eye, Crocs were strangely hip. Croc kiosks offering a wide array of colors and sizes became ubiquitous in airports, malls and retail outlets to cater to kids, moms and businessmen alike.

Then one day someone ran into George, their profoundly “uncool” neighbor, wearing his neon green Crocs. For some reason, they just didn’t look the same on George — who was pale and out-of-shape, wearing shorts several dreadful inches above his knees — as they did on Kobe Bryant. Crocs were done. The complete uncool to cool and then back to uncool cycle had transpired before our eyes.

Unfortunately, investment strategies have waves of cool and uncool as well.  When we started MarketRiders, we knew that our biggest marketing challenge would be its lack of cool.  How could an investment philosophy that replaces the casino-like thrill investing with a sane, buttoned-up institutional method, ever compete with the daily fun and excitement of a Jim Cramer?

But Gladwell’s process seems to be taking hold and low-cost investing seems to suddenly be getting, well, cool.  New websites are launching every month to tout the merits of the MarketRiders approach.  Schwab, Fidelity, and Vanguard are actively swapping investors out of expensive mutual funds and into ETFs.

Cool or uncool, we’ll keep wearing our version of pink Crocs not because Kobe wears them or that our neighbor George does not. No, we stay faithful to our approach because we simply love how this pair of sandals fits.

Sadly, it was no surprise to learn the Goldman Sachs threw their clients “under the bus” by deceitfully selling them mortgage securities while at the same time making a killing on shorting the housing market.  Their slogan, “Helping clients build and preserve their financial wealth” needs a minor adjustment. “Helping clients build and preserve OUR financial wealth.” This is a paragon of the Wall Street ethic – make money (hmmm – a lot of money) even if you must trample your client under foot. When you manage your own diversified portfolio of ETFs through a MarketRiders account, you truly get Wall Street out of your pocketbook by removing the intermediaries.

The Wall Street gurus seem to have a closet full of tricks to help investors outperform the market. Unfortunately, most of this advice is unproven and ineffective. In this MoneyWatch article, James Picerno points out one of the ONLY scientifically proven secrets to boost portfolio returns year-upon-year – disciplined rebalancing. Mr. Picerno underscores that rebalancing can deliver a 0.5 to 1.0 percentage point annual bonus compared to what you’d earn on the same portfolio that’s left alone. Our research shows that by using MarketRiders’ advanced rebalancing algorithms rather than a simple calendar based approach, investors add up to 2% additional growth in some portfolios and market conditions. We have more on this topic here: “How Often Do I Need to Rebalance?”.

When it comes to retirement investing, remember that you don’t have as many friends in the financial services industry as you think. By taking the time to learn the virtues of low cost indexing, global diversification and disciplined rebalancing, you will truly build and preserve YOUR wealth.

So when it comes to investing in any type of fund, be it index mutual funds, exchange traded funds (ETFs) or mutual funds, investors need to be their own advocate.  Do your homework to understand your true costs as no two funds are exactly alike.  ’Americans save trillions of dollars for college education and retirement by investing it with funds managed by industry and giants like the Vanguard Group and Fidelity Investments.’

If you are new to the game, beginners should brush up on Investing 101 basics. There are a lot of choices. Make the smartest choice for YOU.  Just remember, time is your friend.  Money spent on fees today, compounded over time, is money that could be sitting in your retirement account. Do your homework, you will thank yourself later!

To paraphrase Warren, most investors should “do as I say, not as I do.”  The world’s greatest investor warns us against trying to imitate his stock picking abilities.  His unwavering advice for years has been to buy index funds because:  a) very few people have it in their DNA to be a great investor, and b) those who charge you for their investment expertise can rarely outperform the market due to their onerous fees.

To bring home his advice we’ve pulled together a rare 8 minute Buffett video, evidence a $1 million bet he made, and a fable that he wrote.

A Fable.  Read excerpts from Berkshire Hathaway’s 2005 and 2006 annual reports where Buffett describes what happens to the imaginary Gotrocks family when they begin taking help from Wall Street.

“…imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks… In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.  But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others….  The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.”

The $1m Wager. Buffett bet Protégé partners, a fund of hedge funds, $1,000,000 that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.  Buffett’s bet is a bet on high fees.  His view:  regardless of how good the money managers are, the hedge fund fee structure is so high, that it will, over 10 years, wipe away any gains achieved from beating the market.

The Lecture. Warren Buffett spoke to a group of students at the University of Florida and answered questions for ninety minutes about his investment philosophy.   Fast forward to the 1:15 minute mark on this great video where he says:

“If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent – maybe more than 99 percent – of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all – that is the way they should approach it.”

Just because you can pick up a golf club doesn’t mean you should bet all your savings on your getting on the PGA tour.  And just because you (or someone in a suit at an investment management firm) can place a trade at an online broker, doesn’t mean you figure out a better strategy than using index funds in an asset allocation strategy for your retirement investing.

Do as I say, not as I do.  Thank you Warren.

With such a huge gap between those feeling comfortable investing in stocks themselves and those that feel stocks are an important component of their portfolio, comes the opportunity for one to turn to stock index funds and exchange traded funds.  With index funds you are still a player in the stock market, but the risks are less as you own a basket of stocks, not one individual company, and purchasing them through your discount broker is cost effective and quite easy.  Stock picking and market timing, though claimed to be figured out by many on Wall Street, is hardly ever done time and time again with great success.  The fundamentals of investing 101 might help you make a solid educated guess on what companies to invest in but let’s face it, investing in individual stocks, for beginners and experienced investors alike can still be a risky venture.  So, for those currently not comfortable investing in stocks on their own, check out index funds.  While you are at it, check out some of the on-line portfolio management tools out on the market to help you manage your overall portfolio.

As Mamundi states, “While it has been established that most actively managed mutual funds lag behind their indexes over time, [this] study further twists the knife: Active management suffers even more by comparison on a risk-adjusted basis. The study found that in many cases where an actively managed fund beats its index on an absolute basis, the additional risk it took didn’t justify the returns earned. Not only should that be a warning sign for investors — because greater risk means greater volatility — but it also suggests that fund managers aren’t living up to what is expected of them.”

As Mamundi points out, it is typically thought that a riskier fund should reward investors with higher returns, but contrary to this popular thinking, over the past three years higher risk has equaled lower returns. Travis Pascavis, director of equity indexes at Morningstar, further explains that, “The key to thinking of risk in terms of returns versus an index is that, in theory, if investors wanted to take on more risk for greater returns, they could simply buy an index fund and lever up their exposure. That would also increase returns while adding risk — and do so at a cheaper cost than most actively managed funds. It is against this standard that actively managed funds should be judged.”

Although we at MarketRiders do not encourage adding risk to a globally diversified portfolio of ETFs via leverage or any other means, it is interesting to note that highly paid money managers once again seem to be the only ones benefiting from their higher-risk game.