THE BLOG

Investing USA Style

03/29/2011 07:49 pm ET | Updated May 29, 2011

Ninety percent of individual investors "invest" this way:

Using the Internet, discount brokers or retail brokers, you try to guess the direction of the markets. You follow the financial news. You pick stocks or mutual funds you are told will outperform. You are filled with anxiety, confused, distressed and frustrated. The returns published by top performing mutual funds far exceed your returns. You wonder who is getting those returns. How did those investors know a particular fund was going to do so well?

The predictions of the talking heads on the financial media are mesmerizing. They sound so knowledgeable and intelligent. But if they really have predictive powers, how did they miss the market crash in 2008 and the rapid recovery which continues to date? If you take the time to review the data, you are troubled to learn their track record is no better than the toss of the coin. Is this an intelligent way to plan for retirement?

You don't trust the securities industry. You can't forget it was these "investment gurus" who brought us to the brink of a worldwide depression. If they can't manage their own money, what qualifies them to manage yours? You read about the insider trading scandals and it confirms your suspicion that the playing field is not level. What chance do you have if these guys are on the other side of your trade? It's not just the crooks like Madoff who make you nervous. You have the niggling feeling the entire system is one giant Ponzi scheme, which is simply a pretense for the transfer of your money to those who manage it.

If you have a 401(k) plan, and your employer matches, you still get little comfort. The number of investment options is bewildering. You have no idea how to put together a globally diversified portfolio in an asset allocation appropriate for you. No one at your company can help you. The web site provided by the record keeper for the fund is helpful, but you don't get any advice tailored for you. You keep reading about conflicts of interest and excessive fees in these plans. You know something is wrong, but you have no idea how to fix it.

You have lost confidence in the SEC. It is under funded and under staffed. Most of its employees are just doing their time to build up their resume so they can jump to lucrative jobs with the same industry they are "regulating." You can't forget the sound byte provided by Harry Markopolos in his congressional testimony into the failure of the SEC to detect the Madoff fraud, even though he laid it out for them in agonizing detail: "If you flew the entire SEC staff to Boston, and sat them in Fenway Park, they wouldn't be able to find first base." Can you depend on these lost souls to protect you from Wall Street?

Welcome to what passes for investing in the USA.

Following these simple steps would increase your returns significantly (based on historical data), eliminate your anxiety and put you in control of your finances:

1. Formulate an investing goal. Most investors don't have one. If you don't know how much you will need to accumulate in retirement assets so you (and your surviving spouse or partner) can maintain your quality of life and not die destitute and dependent on others, this would be a worthy goal. You can generate a very helpful report here. Full disclosure: I am affiliated with Index Funds Advisors, which created and administers this report.

2. Fire your "market beating" retail broker or advisor. They have no predictive powers. They can't pick stocks or time the market. Most of them can't even calculate the risk of your portfolio. Their primary goal is to generate fees or commissions, while purporting to have an expertise that doesn't exist.

3. Determine your asset allocation. Invest in a globally diversified portfolio of low cost stock and bond index funds.

4. If you are not familiar with the research of Eugene Fama and Kenneth French, take the time to learn what the largest and most sophisticated investors in the world know about investing. You won't find this information in the financial media or at the office of your retail broker.

This is what investing should be about. It should be investor centric. At present, it's broker centric. The securities industry is fighting hard to keep it that way.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.