Whether a simple language blunder or insight into the psychology of the rich and powerful, Svanberg’s comments touch on a belief held by many – that in this world there are rules for the privileged and then rules for the rest of us little people, conjuring up memories of the late Leona Helmsley’s famous statement that, “only the little people pay taxes”.

Wall Street is founded on the little people premise. One manifestation is seen in the ubiquitous conversation by wealth managers about AUM or Assets Under Management. AUM is the measuring rod of their success and compensation -a topic of their urbane, cocktail-party banter. Every wealth manager or investment adviser is aware of his AUM as well as that of their friends and competitors because it indicates how much one earns.

Wealth managers trim 1% to 1.5% in fees off of “their” AUM every year. The bigger your retirement account, the more you add to your manager’s AUM and you become a “bigger person” in his eyes. If your account is under $500K, you are likely a little person. Some top managers won’t even answer you’re call if you can’t add $5 million to their AUM.

While AUM is the accepted business model, we have a huge problem with it. What value does a wealth manager add that gives him the right to extract a fixed percent every year off the spoils of your life’s work?

We deliver our advice to all for the same low cost regardless of a portfolio’s size. We treat every investor as a big person. There are no special investors who are on the inside track with access to special insights or favors.

At MarketRiders, we’ve begun measuring our success, in part, by AOM, or Assets Out of Management. We track the amount of draining fees from the AUM game that we’ve helped you escape. This week, we celebrate reaching $500 million of AOM and you — our thousands of investors that are now saving millions in fees. Here’s to no little people!

First, stock prices can be random, and it’s best to protect yourself. Don’t learn this the hard way: owning a portfolio of individual stocks that you think you “understand” is dangerous. BP has almost perfectly tracked the S&P 500 for years. Since April 26th, it has lost 50% of its value ($100 billion) due to a unpredictable event. Those who became comfortable with their stalwart, conservative bank and financial stocks (AIG, General Electric) learned about random events in 2008. Diversification means owning thousands of stocks and bonds in six or more asset classes using indexes and ETFs, not 20 stocks that you “like.”

Second, markets are mostly efficient. That’s because the smartest minds in the world are haggling over what companies are worth by trading shares all day. Buy a stock and 99% of the time, you are paying what it is worth. You aren’t getting a bargain, and you’re not going to “beat” the market.

Picture a gigantic computer, programmed with the best logic and infinite processing capacity, recalculating the value of all public companies every second of the day. On April 26 when the spill became front page news, BP dropped from $60 to $50 within days. The computer was busy digesting all the new data as daily shares traded spiked from 5 million to 156 million. By early June, as the spill worsened, the computer dropped BP below $30. Value investors estimated the spill’s damage against BP’s assets, cash flow, and litigation costs and bought from sellers who predicted bankruptcy. By June 10th, the computer was working overtime – 222 million shares were traded and BP closed near $31. But the computer was right: when a $20 billion settlement fund was announced a week later, BP’s price hardly budged.

Over a 10 – 30 year time horizon, you’re no match for the computer and neither is your financial adviser. It’ll out-think you. It’ll never get exhausted. Remember BP next time you are tempted to buy that stock you “like,” and then take that extra cash and rebalance your ETF portfolio.

Similarly with such market volatility in recent weeks, a few MarketRiders members have been asked to make some tough calls when, depending upon the portfolio, our rebalancing algorithms have alerted them to add to positions like, of all things, Europe. “Are you serious?” one member moaned. “Everyone knows Europe is blowing up. Why buy more now?”

Just like the man from the quote above, this member was having a tough time sticking with the plan. Sorry, but “buy low sell high” is tough to do. Successful investors must continually bet against the crowd, always with deep conviction, coupled with a tug of “unbelief.”

The MarketRiders system of buy, hold, rebalance is an investment approach, based upon solid research and unshakable facts. We can never remove all doubt, but we’ve harnessed the most scientifically verifiable investment approach known today. Rebalancing adds to returns and helps manage risk. You maintain your target allocations, and the risk level you set for yourself when you built your portfolio. Riding winners if fun, but what goes up, certainly comes down. Moving from religion to the casino: rebalancing forces you to “take money off the table” and add to losing bets that will be tomorrow’s winning ones.

It’s tough to maintain your allocations, and trimming a gold position or buying Europe while it is apparently swirling down the toilet is not easy. At moments like these, lean into the facts of the scientific research, push back your emotions and then rebalance your portfolio. You will be glad you did.

You may be wasting your time.  Does persistence, effort, practice, and increased activity over time make one a better investor?

In most every field of endeavor, we are paid on amount and quality of our output.  Lawyers paid to write contracts, negotiate, or litigate. Teachers are paid to teach, janitors to clean and engineers to code.  Unless you are a hyper-kinetic professional trader with a true edge, one of the paradoxes of investing, is that activity and knowledge, have little or no correlation with success.  In fact more activity usually leads to bad results.

Active investing is about being right, not what you “do.”  Warren Buffett has 2 great quotes on this topic:  “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell….We don’t get paid for activity, just for being right.”

Do you know enough to be right, to bet against everyone else?  If not, just use MarketRiders.

If you must actively invest, at least measure whether you’re adding to your net worth or just engaging in expensive entertainment.  Use our online portfolio manager to build a virtual  portfolio to benchmark yourself.  Let’s say you have a portfolio with 1/3 equally spread amongst your favorite tech stocks, a few large caps and some commodity stock.  You can use our 5 step process (the right yellow box when you click “Create A Portfolio”) and build a virtual portfolio with 3 ETFs:  a tech, large cap and a commodity.  Put an equal amount of capital in your virtual portfolio and see who wins – your portfolio or the ETFs.  The lesson may be sobering.

There were lots of great articles this week about tools for investing.  We were mentioned in Money Magazine and BusinessWeek as the do-it-yourself movement continues to gain steam. 

One new MarketRiders member asked the other day, why we recommended VGK, an index made up of the largest 482 stocks in 16 European countries when “everyone knows” that Europe is in trouble. VGK is down 18% this year, while the S&P is down 2%.

First, think of the thousands of investors all around the world, who deeply understand the economic circumstances of every country in Europe, focused every second on figuring out what every one of those 482 stocks are worth.  Is your opinion on VGK’s price better than theirs?  Second, VGK belongs in a globally diversified portfolio, because we care about the long term.  Europe will recover.  In 10 years, VGK’s price today will likely look cheap because those 482 companies will be more valuable.

Last summer when gold was $900 an ounce, a member declined to include it in his recommended portfolio because in his opinion “it was over valued.” Today its hitting $1200.

It’s during times like these, that you can really appreciate the calming logic of the MarketRiders investment methodology.  Trying to time and guess the market’s direction is futile for most mortals and investment professionals.  MarketRiders is based upon the idea that since we never know how an asset class will perform — we own them all at a very low cost, in proportion to our risk tolerance and we rebalance them as the markets shift.

Sounds easy to “buy low and sell high” doesn’t it?  When you receive a rebalancing alert to buy VGK, are you willing to buy more Europe?  We certainly hope so.

Is your asset allocation right?  This market provides you with a litmus test.  If you are feeling panic, then perhaps your stomach lining isn’t strong enough for amount of equities in your portfolio.  It may be time to consider whether you should increase your exposure to bonds and TIPs.  Our software makes it easy to do this by clicking on “Change Targets % or ETFs” on the dashboard.

Markets like these test you.  Stay the course and take a gut check.  With MarketRiders, your fees are rock bottom.  Follow your rebalancing alerts to take advantage of the market’s volatility, and if your allocation is right, you’ll be able to keep your mind off the stock market.

Investors who have decided to enter this tournament via day trading, market timing, technical analysis or even tactical asset allocation, need to pay close attention. You are playing a game that is very difficult to win, especially if you have fewer resources, knowledge and technology than your competition. Oh, sure, you might be lucky enough to win a few early hands but the long-term outcome is fairly predictable. Such investors live with a prevailing sense of unrest knowing that they have shown up to a shotgun duel carrying a pocketknife.

Wealthy families, endowments and elite institutions practice a different investment approach. These investors are wise enough to avoid, paying fees to managers trying to “beat” the averages in public stock markets. Sure, they may invest in private equity and venture capital where they enjoy an advantage via access to the best deals and terms. But when it comes to public markets, these investors commit a large portion of their portfolio to passive indexed strategies – the MarketRiders approach. The only bet such investors are making is that the world is in fact not coming to an end any time soon and that its markets, companies and their portfolio will continue to grow over long periods of time.

This approach provides amazing freedom from having to stare at your portfolio several times a day. Unconcerned about the daily gyrations of Jim Cramer and the rest of the bobble-headed finance media, long-term and disciplined MarketRiders can go about their daily lives with peace of mind. Sure, the market is down May and your portfolio probably dropped with it, but with a retirement time-horizon that is years away, your portfolio will not only recover, but grow quite nicely.  And by rebalancing you are taking advantage of these swings.  This knowledge frees you from staring at a computer monitor and gives you time to go about the real business of living your life.  In the end, isn’t that what the money is actually for?

1.  Sign up for a MarketRiders 30 day Free Trial.  There is a “sign-up” link on the top right of www.marketriders.com.

2.  You will be asked to create your first portfolio and you’ll have 2 options:  “Build It For Me” and “Let Me Build It.”  Choose “Let Me Build It.”

3.  In Step 1 of 5, you’ll see a list of templates that you can use in a pull-down menu.  The CNBC model portfolios are listed in these templates.  Select the portfolio that you’d like to use.

4.  In Steps 2 and 3 of 5, you’ll be able to alter the asset allocations and ETFs in the CNBC portfolios.   If you don’t want to change anything in the CNBC portfolios, click “Next” at these steps and go to Step 4 of 5.

5.  In Step 4 of 5, name your portfolio and enter the amount you want to invest so MarketRiders can calculate the number of shares you need to purchase of each ETF and email you a list.

6.  Once you’ve purchased the ETFs, enter the costs into MarketRiders and you’ll receive an email notification when the actual allocations stray from the CNBC targets so you can then rebalance portfolio.  On the dashboard, you can “Change Alert Settings” to make these alerts more or less frequent.

Read more about the CNBC portfolios here:

www.cnbc.com/id/34726386

And of course, a plethora of explanations quickly followed. We heard about the “fat thumb” scenario describing a trader who, keying in the wrong trade, sold billions of shares instead of millions, triggered the collapse. One of the more interesting explanations is a truly bizarre account involving Nassim Taleb, trader and author of “The Black Swan,” a book that discusses high-impact, impossible-to-predict, and rare events that are beyond the realm of normal expectations.  According to this grand irony, Taleb’s fund placed a sizable S&P short that got the ball rolling for Thursday’s violent selling — creating his own “black swan.”  In the end, however, the 1000-point drop remains a mystery, and in the absence of any truly credible and complete explanation, market fear has been resurrected.

More important than understanding the cause of this event is understanding how you responded to it.  Did you yawn, or did you freak? For those who live by the market’s vicissitudes, May 6th was an apoplectic ride on a terrifying roller coaster. With each swing of the market, such investors sit glued to the ticker, at one moment thrilled, the next gripped by dread. For those of us who are MarketRiders, such days produce a yawn.

With our investments sheltered by a distant time horizon, low fees and smart diversification, we are free to go about the more important business of our lives. Some investors prefer drama. We prefer peace-of-mind.

If you haven’t sold your actively managed mutual funds, then at least look at what you are paying for them. You’ll get a free customized report comparing your mutual funds to ETFs in seconds. Here is the link: Mutual Fund Fee Analyzer. Pass it along to friends and family you care about.

Once you find out how expensive your funds are, you might say: “I have good mutual fund managers. They do beat the market.” You are missing the point – it’s not the fund, it’s the portfolio. As Rick Ferri says in last week’s Forbes article, “we buy a portfolio of five or more funds. Accordingly, the right question that investors should ask is this: What is the best portfolio approach?” He then proves that the chances of a portfolio of mutual funds beating the market are close to 0% over a long time horizon.

“The more active funds you own, the smaller the chance you’ll beat an all index fund portfolio. A portfolio composed of five actively managed funds had a 32% probability of beating an all index fund portfolio over one year, 18% over five years, 11% over 10 years and just 3% over 25 years.”

Next you owe it to yourself to ask: Who’s really in charge of your mutual fund?  How are important decisions made? Read this recent Wall Street Journal article that addresses those questions. ”When mutual-fund investors think about who’s responsible for the performance-or underperformance-of their shares, they usually tag the fund manager.   In doing so, though, investors too often ignore the people who ultimately oversee their funds: the fund trustees. The trustees have a legal responsibility to evaluate the performance of fund managers, the power to hire and fire them, and the authority to set the fund’s fees as well.”

So now, after knowing what you know, consider looking at ETFs.  A must read is Tools To Help Pick ETFs.  ”Exchange-traded funds have become increasingly viable as core ingredients of a diversified portfolio. Originally pitched as low-cost alternatives to stock index funds, ETFs are now available for almost every asset class.  But with more than 800 ETFs on the market, choosing which funds to buy has become more difficult.  Some online services from brokerage firms and others can help with both tasks…”

Hopefully, after using the mutual fund fee analyzer and reading these articles you’ll finally be convinced to sell every actively managed mutual fund that you own on Monday and replace them with low cost ETFs. It could mean the difference between retiring in a tent in your backyard instead of in a villa in Cabo.

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.