Index funds are great tools to diversify your portfolio; their low cost structure gives you, the investor, a great deal more for your money.  With everyone including Warren Buffett praising index funds what could possibly be wrong with them?

The problem is that index funds are stupid, they go for a ride where ever the market goes completely ignoring the fact that hysteria happens and people dump stocks on bad news or buy it on good news. Balancing out a portfolio based on market value of a security within the index means that it’ll be naturally underweight precisely at the time when you should be buying and overweight when it’s a good time to sell.

That could easily be avoided by getting a value adjusted index fund. In this type of fund the weight of a stock in the index is influenced by some rudimentary statistics like book value or the price-earnings ratio.  Stocks with a good value would get a slightly higher weighting than the market value would suggest.  Similarly stocks that are not looking good from a value perspective will be bought less than its weight in the index. The value adjusted index fund seems like a great investment. But the selection just isn’t there.

There are ETFs for just about everything, almost none of them do anything intelligent to reduce the risk during a recession or bubble.  They are the perfect investment vehicle for long term investing because over the long term returns should be pretty good.  In the short term however there is no risk management.  A good investment manager at least has a chance to do things like avoid overly volatile stocks, or highly speculative stocks.

There is an interesting dynamic that can happen in the event of a major market shift.  Money managers with their head to the ground can make quick decisions that move the market.  About a week later there can be an echo effect where all the people at home, have read the newspaper, done their research, came to a decision, and called their broker to move all their money in reaction to the market. That echo can move the market further in the same direction.  An ETF plays it neutral, buying/selling in sync with the market whereas the quick buying money manager will see additional gains as a result of the second market movement.

There is some very good research being done that shows simple analysis can decrease risk and increase returns.  Academic studies that examine various trading strategies over the long term find better performing algorithms than index funds.  Why ignore that research and just buy everything?   Why expose yourself to risk that can be managed?

I don’t want to say that index funds and ETFs are bad investments.  They are probably one of the best investment products available, however, they are not perfect, and you should be aware of the risks.

Technorati Tags: etfs, index funds, investing, risk management

Within the stock market the penny stock and micro cap category of stocks has historically returned some of the most impressive returns. The opportunity to make the most money is in the penny stock market. But this market is not influenced by the same factors as the larger stocks. What affects a 50 cent stock is drastically different from what causes a stock like Microsoft to go up or down. Penny stock prices are influenced very little by financial reports or fundamental aspects of the companies.

In the penny stock world there are some easy ways to make money. Someone somewhere creates a promotion for a stock and then forwards that out to many people. It doesn’t take much buying interest to impact the price of an illiquid penny stock. So you get in early, let the price rise as interest in the company build due to the promotion and then sell early locking in the gains. A good promotion can push prices up 1000% giving investors MASSIVE returns.

Some of the people that run these promotions will let you in on the action. You get in before the main promotion goes live in order to lock in at the lower price. The price goes up due to the promotion over the next few days at which point you sell and make a nice profit.

The Majority of these services are very expensive (they are basically selling free money). Some charge over $1000 just to be a member and receive these picks. Here’s a review of two more affordable offerings that still will reliably make serious amounts of money.

Promo Stock Picks Is an AMAZING product and service The owner of this site is a professional broker that has been promoting stocks for over a decade. He has been featured in Wall Street Journal and he is recognized as the world’s greatest stock promoters. He has created documented millionaires and multimillionaires since starting promoting stocks. The average profit on these stocks is over 125% which is life changing money. At just $47 how can you go wrong?

Doubling Stocks It’s questionable if this service is actually a promoter of stocks. They claim to have a software “robot” that does the picking for them, but many people claim that that is just a story used to sell the newsletter. However it works the picks are good and you will make money with this robot’s stock picks.

There really aren’t any other programs that are worth mentioning. You can make money very easily with either of these programs. They appear to come from the same source but without a doubt the hands down choice is Promo Stock Picks.

I recently read a good tip from one of the best value investors alive today. Chris Browne has an extraordinary record for delivering returns to investors and in his book “The Little Book of Value Investing” he not only gives a good overview of just what’s involved in getting started as a value investor, he also gives some great advice about allocating a portfolio.

The ordinary advice I hear is to base your allocation between bonds or fixed income instruments and stocks using a formula based on your age. 120 – (your age) = percentage that should be in stocks, the rest should be in fixed income. Chris Browne makes a good argument against that. While there is a good reason to have a portion of your portfolio in bonds that portion should never exceed 3 years worth of income.

Here’s why:

As a stock investor the worst thing to do is to sell when the market is down. In most rolling 3 year periods throughout history the return from bonds is lower than that from stocks. If you needed to access the money in your portfolio during a down turn in the market it would make more sense to liquidate the bonds rather than sell the stocks at a depressed price.

Over longer periods a stock portfolio returns significantly better returns and is better tied to inflation than bonds are. Why give up on those better returns?

Take Home Advice:

1. Keep a relatively small portion of your portfolio in bonds. (maximum of 3 years income)
2. Any long term investments should be in stocks for the higher returns
3. If the market is down take money from the bonds, if it’s up take money from the stocks.

Just posted a new page about how to buy stocks according to the legendary investor and father of value investing Ben Graham. Ben Graham’s students include Warren Buffett and many other people that have become rich on the techniques for evaluating stocks. This time tested method has returned an average of 15% per year for decades.

Check out the post here: How to buy stocks

Marl is the stock picking robot designed by Michael and Carl that has been doing a remarkable job of picking winning penny stocks that have been performing an average of 80% returns.

I myself am a programmer working for a portfolio management company and I can attest that these returns are entirely possible with the system that they have developed!

Michael, a former employee of Goldman Sachs, decided to go his own route and build a technical trading bot himself. It proved successful right from the start, returning 42% within the first 3 hours of the bots first stock pick.

Click Here.

The longer this thing runs the more it is learning about the technical market patterns and the better it is becoming at picking winning stocks. Marl the bot is proving to be far better at identifying good stock buys than any human could be because it analyzes many thousands of stocks before making a decision, and will only report back if it finds one that has a very strong chance of doubling in value very quickly.

Read more about Marl the stock picking robot Here.

Technorati Tags: doubling stocks, marl the robot, penny stock picks, stock picking, stock picking robot, stock picks