The System Revealed
It's no secret that casinos use hidden cameras to spot guests who have developed a "system" that turns the odds against the House. These guests are quickly ushered to the exits, as they threaten to wipe out the casino.
Sadly, Wall Street operates sort of like a giant casino that wants to keep you at their table, playing by their rules, so they can keep taking your money. They spend most of their time and money convincing you that you can beat the odds (with their help). But in truth they know you are destined to lose.
The last thing Wall Street wants you to do is start using a system that works. With such a system, you no longer need Wall Street and they have to fold their hand. And with $12 trillion in mutual fund money on the table, the stakes are pretty darn high.
So here's The System. These 4 steps can help you harness the Law of Compounding and grow your money quickly and easily, with minimal risk:
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1. Own markets instead of stocks (asset allocation)
Asset allocation is the process of dividing up your investment money to create a portfolio that minimizes risk and maximizes returns. Some people think it's all about which stock you own. Wall Street would certainly have you believe that this notion. But in truth, investment success is more dependent on which markets you choose.
How did we arrive at this conclusion? We looked at research from experts. Yale professors studied money managers over 10 years to uncover the source of their portfolio performance. They found that 90% of the returns came from the markets where they invested. Less than 10% came from the individual stocks they bought and the timing of buying and selling investments. For example, if they owned small cap value 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.
MarketRiders portfolios balance risk by choosing complementary markets instead of individual stocks. Our portfolio engine will show you how to allocate funds according to your age, experience, amount of money to invest and risk tolerance.
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2. Own more markets to reduce your risk (diversification)
You might think that as Wall Street goes, so goes the world. But when you study world markets today, you quickly see that they actually tend to move quite independently. Therein lies the secret of diversification.
Diversification 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.
Markets are the ingredients of successful diversification-and the more you have, the better. 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, without sacrificing performance.
Savory stew
U.S. stocks and stocks in other developed countries tend to move independently from each other. So allocating money to both markets creates instant diversification. Emerging markets 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. Look at the chart below and you'll see that 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, it's possible to build a diversified portfolio with assets that move of their own accord. MarketRiders believes that diversified portfolio should include U.S. stocks of large and small companies, Foreign developed countries, Emerging markets, U.S. government bonds, Real Estate, and Commodities.
3. Gain exposure to markets with low cost index funds (ETFs)
Index funds hold stocks in all the companies within an overall market as defined by the Index. Some of the most popular indexes are the S&P 500 (tracks the largest U.S. public companies), the Russell 2000 (tracks some of the smallest U.S. public companies) and the Morgan Stanley Europe Asia Far East (EAFE) index, composed of companies in developed foreign countries. When you invest in an index fund, you can basically sit back and watch it ride the market instead of trying to select a few stocks within the index that will "beat" it.
Exchange Traded Funds (ETFs) are the cheapest and most tax efficient index funds you can own. With ETFs you can invest in practically any market you want. But here's the cost-saving difference: You can buy ETFs on the stock exchange through a discount broker-just like stocks-at a cost in the neighborhood of $10 per trade. ETF management fees (average .22% per year) and turnover (which turns into taxes you have to pay) are exceptionally low.
Sit back and let it ride
To allow the Law of Compounding to work its magic, it's important to hold your ETFs as long as possible so you pay minimal taxes on dividends. And really, unless you decide to get out of a market, there are few good reasons to sell. Better to hold on and ride the markets, continuing to enjoy the benefits of Law of Compounding at rates that have averaged around 9% a year through history.
Still yearning for the excitement of individual stocks or "high-flying" mutual funds? If you're determined to beat the house, you might as well go to Las Vegas. It has nicer hotels than Wall Street for nursing your financial wounds.
4. Rebalance your portfolio regularly
One of the nice things about MarketRiders portfolios is that once you set up your portfolio and allocate percentages to various markets, you can sit back and let the markets perform pretty much on automatic. Still, markets do ebb and flow over time, and your allocations will shift from target percentages.
To keep your portfolio in balance, you'll want to rebalance it regularly. Basically, it means taking the counter intuitive action of selling shares of markets that are performing well and buying more shares of ones that have been lagging. MarketRiders' portfolio engine makes rebalancing incredibly easy, showing you what to buy and sell to realign with your target percentages. You can also add capital to your portfolio at any time and let the portfolio engine show you the recommended allocations.
We will email you periodically with a breakdown of your performance and recommendations for rebalancing your portfolio.
