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.

In the time travel movie Frequency, this Yahoo stock tip was passed through time to the six-year-old Gordo via a mysterious interplay of a ham radio and the aurora borealis. This small bit of incomprehensible information was not only retained by Gordo, but later, when he grew up and became a stock trader, it resulted in him not only being fat, but quite happy as well.

The power of knowing the future is profound. Just imagine, for a moment, if you were given the privilege of seeing stock market results one year from today. A resourceful individual could easily parlay that knowledge into profound wealth. It is no wonder that economists, stock traders, fund managers, and financial advisers alike are desperately trying to find a way to peak around the corner of time to anticipate what the markets will do.

Forecasting markets is not for the feint of heart. Take, for instance, the recent housing bust and subsequent recession. Top economists and investors alike failed to see it coming. Ben Bernanke, the Federal Reserve chairman, testified at the Financial Crisis Inquiry Commission (FCIC) that, “We knew all those numbers, of course, but a lot of smart people, including people like Paul Volcker and others, . . . got it wrong. It is just another example of how difficult it is to predict.” Furthermore, Alan Greenspan commented, “We all misjudged the risks involved. Everybody missed it—academia, the Federal Reserve, all the regulators.”

It was not only the economists that failed to see the crisis coming, but leading investors as well. Take George Soros as an example. He became one of the world’s richest people by predicting the UK currency collapse and betting accordingly, and yet he took an ill-fated stake in Lehman Brothers just before the bank failed in 2008. Likewise, Warren Buffett, the Oracle of Omaha, lost billions in the downturn and testified before the FCIC that “no one saw the housing bubble.”

But just when you think that such foresight is outside the reach of common man, some prognosticator emerges with a specific contrarian view and then with eerie accuracy hits the nail on the head. It’s as though he found his own flux capacitor-equipped DeLorean and sailed from the future to the present with otherworldly insight.

Take for instance, the small group of esteemed economists and financial managers that called the housing crisis. There is Dean Baker, the co-director of the Center for Economic and Policy Research in Washington, D.C., who in the August 4, 2004 issue of The Nation gave a detailed warning concerning the coming housing crisis in an article called Bush’s House of Cards. His predictions were five years early and largely ignored. Then there is Med Jones, the president of the International Institute of Management (IIM), a U.S.-based research and education organization. Although Jones is less known, he turned out to be the most accurate in predicting many of the downturn’s details.

Nouriel Roubini, an NYU economics professor known as Dr. Doom for his wild and dire predictions, became a media darling because of his accurate foretelling of the crisis. More bearish still is Peter Schiff, who now famously predicted the housing collapse in nationally televised debates. Although ridiculed by experts, he showed great courage, and his detailed analysis proved right in the end.

It is these types of expert forecasts that make investors seek the next accurate prediction. Think of how you might have managed your portfolio differently if you had only listened to these warnings before the housing crash. Furthermore, today, there are forecasters out there who are nailing their predictions right before our eyes. A year from now, many will lament the fact that their laser-sharp predictions were carelessly ignored.

So how does an investor know which forecasts to follow and which to ignore? The first thought that comes to mind is to follow the predictions of those that have gotten it right in the past. This method, however, proves to be ill fated. Take, for instance, the four gurus that called the housing crisis. Since that time, each of these prognosticators has supplied a long list of additional predictions. Sadly, the overwhelming majority of them have been tragically afield. In a famous prediction from 2002, Peter Schiff asserted that the Nasdaq would hit 500 and that the Dow would crash to 4,000. If you had followed his advice, you would have lost your shirt.

Nouriel Roubini has made over 30 economic predictions since 2006, with 22 coming up wrong and seven still awaiting fulfillment. Well, at least he got one right—the housing crisis. Whereas Med Jones seems to have a better batting average, Dean Baker’s predictions are about 50/50.

In the end, stock forecasting seems to be a bit more Abracadabra than most investors would prefer. As much as we would like the aurora borealis or at least something or someone to whisper an accurate stock tip that would leave us fat and happy, we are left with the harsh reality that forecasters often flop.

With no real way of seeing around the corner of time, smart investors are left with the proven methods of global asset allocation, low-cost indexing, and disciplined rebalancing. This proven approach may not provide the wonders of time travel, but it does provide a nice bounty to the principled and disciplined—over the long haul.

In the last 80 years, stocks have returned about 10 percent, while bonds have returned about 5 percent. An average balanced portfolio should therefore return around 7.5 percent over a long time period. If you grow your money at 7.5 percent each year, you’ll double your money every 9 to 10 years. Let us call these “returns before advice and taxes.” This is the baseline.

Paying for investment help can be very expensive. If you pay mutual fund and advisory fees of 2.5 percent, you have a silent “business partner” who is taking a third of your 7.5 percent investment profits for advice. Over a 20-year period, unless these advisers are making up the difference, which is statistically close to impossible, you lose big money—slowly, quietly, and imperceptibly. Your account will grow in good years, but it won’t grow enough. Over time, you’ll notice that everything is becoming more expensive and your portfolio is “small” when years ago it seemed much larger.

If investment advice doesn’t do you in, taxes will. Mutual funds and advisers never report investment returns “after tax” because this would dramatically reduce returns. Most mutual funds are trading machines, generating huge amounts of short-term capital gains. But taxes are never factored into the advertising. Let’s say that federal and state taxes are 40 percent on short-term gains and 20 percent on long-term gains. You invest in two funds. Let’s call them the “Furious Trading Fund” and the “Buy and Forget Fund.” If Furious is up 15 percent, you’ll net 10 percent after tax. But Buy and Forget only needs to be up 12.5 percent, to net you same 10 percent after tax. Furious has to do 20 percent better than Buy and Forget just to get you to the same place!

Smart investors don’t pay much in taxes on their investments because they don’t trade in and out their positions. They spread their money around the world in different types of stocks and bonds in percentages based upon their objectives (called “asset allocation”) using exchange-traded funds (ETFs). They own a core portfolio with most of their net worth consisting of 10 to 15 ETFs to get nearly complete diversity in stocks, real estate, commodities, and bonds. Each ETF represents an entire stock or bond market that is an essential ingredient to a portfolio. They hold these same ETFs forever.

But this is far from “buy and hold.” Over time, the relative proportions of each ETF within the portfolio will need to change. If bonds are up this year and stocks are down, it is critical to trim bond ETFs and add to stock ETFs. People age and should start shifting more of the portfolio into bonds: same ETFs, different weightings.

Here’s where taxes are minimized. After owning a passively managed ETF portfolio for one year, all gains that come from selling the ETFs are taxed at long-term rates. And ETFs have a special tax structure that rarely generates taxable income except for dividends. By trimming and adding, you only incur a small amount of long-term tax, but the gains continue accruing tax-free. The smart investor tinkers around a few times a year, but never “gets in and gets out.”

If you keep Uncle Sam and Wall Street at bay, you can keep most of your returns. If you let them into your portfolio, you may well find yourself half as rich as you could have been.

“It’s my nature,” says the scorpion. “That’s what I do.”

When you choose someone to help you with financial advice, it is important to know “what they do.”

In professions where the provider is helping individuals with highly personal and important areas like health, credentials mean that the person has earned the right to be trusted. There are understood standards and norms. Doctors are credentialed for his field of medicine. Chiropractors have a different type of training and certification than an oncologist. We know who we are seeing and what they are supposed to be able to do. Attorneys who have passed the bar went through law school and have the legal right to practice.

Such clear certification is very confusing in financial services. It may look like a professional broker at Merrill Lynch or Morgan Stanley provides the same service as someone who is a registered investment advisor. But nothing could be further from the truth. This distinction is critical to understand no matter how much you trust the individual.

A person who is a broker, is just that. He acts as an agent between a buyer and seller of products, usually for a commission. Legally, an individual who works for a “broker/dealer” must pass a “Series 7″ exam, which teaches one about the stock market and securities to prepare the individual to sell commissioned products. Brokers operate under a “suitability standard” under which the broker is required to make investments he judges to be suitable for his clients. He can’t sell micro-cap volatile stocks to old ladies. Brokers and their firms are regulated by a “self regulated organization” (not a government agency) called FINRA. In the industry, brokers are measured by the amount of commissions and fees that they generate from selling products. Product providers pay more for “distribution” through brokers.

Registered investment advisors (RIAs) help individuals manage their money. They must pass a “Series 65″ exam, which tests how well one knows how to help a client invest and operate under a fiduciary standard. That means an advisor is required to act in his clients’ best interests, and disclose to them all conflicts of interest. These advisors are either registered in the state in which they operate, or with the Securities and Exchange Commission (SEC). RIAs are usually measured by assets under management (AUM) because the more assets they manage, the more their fees. They submit lengthy ADV II forms online showing any conflicts of interest, sanctions from the SEC, and exactly how they are paid.

RIAs can’t use customer testimonials in advertising and must disclose when they pay for client referrals. Brokers can use testimonials and hide fees they are paid for referrals.

Under Dodd-Frank, legislators are now considering implementing a fiduciary standard for brokers. They are fit to be tied. The central issue is that if they are required to put your interests ahead of theirs, they will have to disclose conflicts of interest and fees. FINRA is spending a fortune to fight this because if they disclose all fees they receive from all parties, investors will get wise and they will earn less. FINRA’s CEO earned nearly $3 million last year, and FINRA’s top 10 employees all earn over $1 million. They don’t want their members paying them less, so everyone is pulling out all the stops.

A good analogy for the broker versus investment advisor is the difference between an optician and an ophthalmologist. An optometrist conducts eye exams and makes sure that you have healthy eyes but makes money primarily selling you glasses and contact lenses. When you have a cataract, or something serious, you go to a medical doctor—or an ophthalmologist. He has taken a Hippocratic oath to practice medicine ethically. He sells nothing. He puts your health first and can also examine your eyes.

Do you want to trust your money to someone who is just paid for advice? Or a broker who makes money providing advice in order to sell products?

Just remember: If you’re carrying someone across the river, you may want to check on “what they do.”

The numbers are in – employment growth down, real estate down, manufacturing down, debt problems at home, debt problems abroad and so the financial pundits have come forth from their glass towered temples to offer their counsel. And like well-behaved cattle, the mooing masses have left their fair pasture and are being herded through the rancher’s gate to some unknown but new destination that will provide the hoped for upgraded cud for the chewing. Or might it be the slaughterhouse?

Herd mentality is well researched and highly documented amongst philosophers such as Søren Kierkegaard and Friedrich Nietzsche , scientist Wilfred Trotter, psychologists Freud and Jung, and economists such as Thorstien Veblen to name only a few. It is easily seen in investing through the cyclical frenzied buying (bubbles) or frantic selling (crashes) of the stock market. These sudden swings are rooted in irrational investing practices and driven by emotion – greed in bubbles and fear in crashes.

New economic data is acted upon within seconds by leading professional portfolio managers armed with cutting edge rapid response technology. These “in-the-know” active managers move the market. The media then reports. Articles grace the front page of national publications and prime-time television. Jim Cramer starts banging and bonking his toys while he yells out “sell, sell, sell,” and the frenzy is afoot.

Our current market is characterized by plenty of mooing these days. Six straight weeks of market losses have not been seen since 2002, and have pushed the Dow Jones industrial average below 12,000 after an exuberant eight-month run in which corporate profits and share prices soared. Just when retirement accounts of ordinary Americans began to look healthy again, bang! We are thrust back into dark times.

And boy, does this type of news preach! This is when the herd really gets moving. Investment advisers are inundated with bleating customers asking to be moved into defensive positions. With herd-like agility, these investors have a knack for timing the lows with perfect precision. Never mind the fact that the system is rigged to slaughter the slow moving cattle that seem to always make their move a bit too late. Still, year-after-year, these retail investors are easily rounded up for the slaughter by the pros that know how to really make a real profit.

Investors forget the fact the stocks do not rise steadily over time. They do so in a rather abrupt series of fits and starts with a few days of large gains sprinkled randomly throughout the year. According to finance professor H. Nejat Seyan, if you missed the ninety best-performing trading days from 1963 to 2004 your annual returns plummet from 11% to 3%. Indeed, you would need to be an oracle to accurately pick the 90 best days out of 14,694!

Suffering from collective irrationality, these investors are like sheep without a shepherd, lacking any sense of long-range vision and guiding principles to anchor their portfolio management.  They are unsheltered, exposed and ready to become prey. They are ships without moorings. Their portfolios are tossed to and from in the market’s choppy seas.

The First lesson of Wall Street is to exploit mass-market psychology by acting in a contrarian fashion. Studies by economists and psychologists have found that investors are most influenced by recent events — market news, political events, earnings, and so on — and ignore long-term investment and economic fundamentals.

As a retirement investor, you have a few clear and simple choices. You can enter the active management fray and compete with the big dogs, you can follow the masses and fall prey to the bloodletting, or you can rise above it all by rooting your investment philosophy in proven science and long-range planning. Driving fees mercilessly down, embracing basic global asset allocation and contrarian rebalancing will deliver you from cud chewing and into a Kwai Chang Caine, Zen-like peace. Instead you can rule your portfolio with long range and academically proven principles, and invest effectively and with peace-of-mind.

The facts are plain to understand. According to the U.S. Securities and Exchange Commission (SEC), the average adviser charges 1.11 percent in annual fees to manage your money. This same adviser is likely to put you into a portfolio of actively managed mutual funds that average more than 1 percent in fees. That places a more than 2 percent burden on your portfolio and drags down performance.

Some investors think that 2 percent is a small price to pay for expert guidance. What many investors fail to realize is that 2 percent represents a shocking 25 percent business partner in your annual earnings. With the average diversified portfolio earning around 8 percent annually, with every dollar you earn you are paying 25 cents for “expert” help.

It is not uncommon for a business partner to invest large sums of money or to work for years to gain 25 percent ownership of a business. What is it that an investment adviser does that should result in such a favorable perch?

Performance? Active management was exposed as a loser game decades ago by the academics. If that is hard for you to accept, add in adviser fees, and it should be easy to see that your portfolio is doomed to underperform.

Trust? Advisers sell many things, trust being at the top of the list. How much can you trust a person that is willing to sell you high-fee, actively managed funds? Trust is a feeling that a smart investor should not trust. Strategy is key. If the adviser fervently recommends indexing, then you have the first building block of trust.

Allocations? How difficult is it in today’s information age to obtain sophisticated asset allocations designed for your needs? Not hard at all. At MarketRiders, you can obtain a globally diversified allocation customized to your needs and optimized for your broker. There is no longer a need to pay high fees for such guidance.

Personal Attention? The average adviser has more than 100 clients and is rewarded for new business development, not taking a deep interest in current customers. Ponder how difficult it must be to stay current on the specific needs of a client when you have 99 others to think about and five more this week you are trying to close. Where do you think that adviser will put his energy? Toward new business and new revenue. Think about it. When was the last time your adviser contacted you?

Although firing your adviser is probably the best thing you could do for your portfolio, some investors do benefit from outside management. Here are three reasons to keep your adviser on staff:

Problem solving. If you are faced with a unique set of problems, tax concerns, or major life decisions, an expert may be the perfect person to help you get on the right track. For problem solving, it is best to hire a financial planner who works by the hour. Get your problems solved and then move on.

Busyness. You may be so busy with your career and family responsibilities that the extra burden of managing your portfolio feels unbearable. Before you go with an adviser, be aware that managing a globally diversified indexed portfolio should take no more than a few hours a year. Even still, some may find the burden too heavy and want someone else to make the call. An adviser might be right for you.

Hand holding. The most notable reason to have an investment adviser manage your account is for behavior reasons. Research reveals that some investors have difficulty staying the course. Buying when the market is up and selling when it is down can be costly. Whipsawed by emotion and market hysteria, such investors would do far better having an adviser oversee the disciplines of smart index investing. While such oversight will cost, being suckered into the next stock tip, chasing trends, and timing the market will result in much greater damage than advisory fees ever could.

If you do hire an adviser, be sure he is committed to indexing, has reasonable flat-rate fees no greater than .25 percent of assets under management, and has transparent reporting and timely communication. Better yet, fire him and take control of your own retirement. Either way, index, stay the course, and retire on schedule.

1. Show me the fees. Most advisers are biased toward investing your money in mutual funds that kick back yearly marketing commissions, which you pay for. Our friend Scott had a $6 million account with one of the largest Wall Street firms, and to make our point, we calculated his mutual fund fees, loads, and extra costs. Last year he paid about $138,000! We switched his portfolio to a MarketRiders portfolio and now he pays $18,000 per year. The solution? Ask for a comprehensive list of all the fees you are paying annually, including those for each fund and your adviser’s fees. Try to get these aggregate fees below 1.5 percent per year. To help get you started, we built a great mutual fund fee calculator to easily calculate these fees.

2. Get invoiced. Most financial advisers charge fees to your investment account. Ask them to instead send you an invoice, and write them a check. At a minimum, ask to be noticed when fees are deducted. That way you’ll stay aware of the cost for these services.

3. Show me the commissions. Ask your adviser to disclose the exact amount of commissions, credits, or any form of compensation he or she is paid as an incentive for having you invest in a certain financial product like a mutual fund, annuity, or life insurance product. Ask for the cost of an index fund alternative so you can understand exactly what it is costing you to be “sold” a particular product, and so you can justify its price in the future.

4. Deduct taxes paid. The average turnover for a mutual fund is 70 percent a year. That means nearly all stocks in a portfolio are sold each year and traded for other stocks. Turnover can create taxable income at year-end. Each February, after these taxes are calculated, give your financial adviser your federal and state tax rates and ask him or her to add up the taxes generated by turnover in your funds. Then withdraw from your accounts the amount you need to pay the taxes so you will be able to know the true after tax returns. After all, that’s what you keep.

5. Benchmarking. Many investors are happy when they make money in a fund. But that’s how amateurs think. Endowments and elite institutions judge their money managers against a benchmark. Each manager must, net of fees, outperform a comparable index fund that charges far lower fees. Have your financial advisor pick a benchmark for each fund and measure your adviser’s fund picking skills by how well that fund performed versus its benchmark. For example, another friend was bragging last week about how well his small-cap fund was doing this year-up over 20 percent! We pointed out to him that the ETF we recommend in MarketRiders portfolios, iShares S&P Small Cap 600 Index (symbol IJR) is up nearly 24 percent this year (as of December 15), and that’s just a computer-managed index of 600 small-cap stocks picked by market capitalization. Our  friend learned that he paid 1.75 percent for under-performance and the fund has had 80 percent turnover this year, which will surely create taxable income. IJR charges only 0.2 percent in fees and has rarely sent a tax bill to holders.

We firmly believe that everyone, no matter what their level of investment experience, should take control of their investing by buying a well-diversified portfolio of index funds, periodically rebalancing their portfolio, and allowing their money to compound without excessive fees. So do Warren Buffett (read what he wrote about fees), John Bogle, David Swensen, and other investment industry luminaries. This is because fees charged by the financial industry, over time, decimate investment returns.

You worked hard for your money. These are reasonable ways to hold your adviser accountable. Don’t blame your adviser if in 15 years, a good chunk of your retirement nest egg has been siphoned away in fees. He was just doing his job.

There is no industry more ridden with conflicts of interest and misaligned incentives than investment management. David Swensen, the Chief Investment Officer of Yale University (one of our MarketRiders experts) writes:  “Relationships with external investment managers provide a fertile breeding ground for conflicts of interests….  (we) seek high risk-adjusted returns, while outside investment advisers pursue substantial, stable flows of fee income.”

To properly evaluate any financial advice you are given, you must understand the incentives of the adviser.  If your broker or insurance agent is your best friend, remember that he feeds his family by selling you “products” that may not be best for you.  The financial adviser you pay by the hour may talk a little too much and be pedantic in delivering his advice to keep the meter running.  Those who are paid a percentage of your assets want more of your money.  We explain these incentives in more detail on our website How Wall Street Keeps You at the Table.

Regulations in the financial services industry put another and more subtle dimension on incentives for advisers.  Did you know that a Broker / Dealer works under different legal standards than a Registered Investment Adviser?  Did you know that a Certified Financial Planner must pass much more rigorous examinations than brokers or advisers?  We’ve brought you articles this week so that you can be more informed about these issues and upcoming regulatory changes that could impact you.

Speaking of incentives, our August 14th newsletter comparing the mutual fund industry to the tobacco industry ended up in the New York Times which prompted the VP of Research at Morningstar to make dismissive comments about our arguments.  Applying the Freakonomics incentives concept, we publicly bet him that a portfolio of 10 ETFs recommended by MarketRiders would beat 10 Morningstar 5-Star rated mutual funds.  He refused to accept our wager.  We weren’t at all surprised.  After all, he’ll make much more money perpetuating the myth that his system works, than losing his own money by actually using it.

The impact of these laws, however, remains unclear. Some argue that they don’t go far enough, while others see them impinging on corporate growth and hampering our weak recovery. Still others believe that these laws are so convoluted that it will take years for practical benefit to trickle down to individual investors.

At MarketRiders, we believe there is a bigger question – not simply a question of whether Big Brother will protect me, but more specifically, will I protect myself? Am I willing to perform the keen analysis and critical thinking required to protect my retirement dollars from malevolent forces that seek to get rich at my expense? Let’s face it – you were smart enough to make the money. You are probably smart enough to protect it as well. By removing unnecessary intermediaries, reducing fees, diversifying, and investing in assets you understand, you can enact your own highly effective financial reform without the aid of Congress.

But with investing, arguably the most competitive and highest stakes game on
earth, few understand the stats. Many who have accumulated sizeable nesteggs from a lifetime of work understand the RBIs and batting averages of their favorite baseball hero better than how their money manager is performing.

The most important element contributing to investment performance is risk. You just can’t evaluate performance without the context of risk. Many investment advisors sell returns, not “risk adjusted” returns. They’ll tell you about their favorite manager who “killed it,” but you’ll never hear that he did so by taking risks that could have led to your losing all of your money.

Evaluating performance without measuring the amount of risk taken is like looking
at a golf score without adjusting for a handicap. The most sophisticated endowments
and family offices rigorously monitor “risk adjusted” performance. They hire the best
money managers and monitor levels of risk. They understand how a manager achieved
his results as much as the results themselves.

If your strategy is to actively manage your portfolio, then measuring risk is a vital,
complex, expensive and time-consuming pursuit. How many fund-of-funds invested in Madoff after extensive due-diligence and were blindsided by the risks they had taken?

Conversely, with MarketRiders passive strategy using ETFs, risk is simple to measure. In return for giving up the prospect of outperforming the market you lower risk, pay lower fees and statistically, “outperform” most who are paying for performance. In a MarketRiders portfolio you’ll never find hidden leverage, quant algorithms predicting market moves, quirky money managers, conflicts of interest or managers placing large bets with your money.

We measure performance by how efficiently our portfolios deliver returns given the
level of risk you were willing to assume (read our methodology section). You will get near exact returns for the amount of risk you are willing to take. In 2008, our low risk portfolios were up because they contained mostly bonds, and our portfolios with large equity allocations were down. The reverse was true in 2009. As we say, it’s about as exciting as watching paint dry.