Illuminati Investments: 10/01/2011

The 5 Rules

Rule #1: Why you shouldn’t buy any stock in the S&P 500 index!

Rule #2: Why you must ignore the asset allocation rules you’ve been conned into believing!

Rule #3: Why you must avoid the majority of mutual funds (they’re risker than you think--learn why)!

Rule #4: How you can protect yourself from the #1 threat to your money in the next 30 days!

Rule #5: The only stocks you should invest in today. These “shadow” stocks beat the market 14-to-1 over the last ten years!

A Tale of Two Markets

Most investors don’t realize this, but there are really TWO stock markets out there.

Are you investing in the right one?

The first market is the one that institutions and most mutual funds invest in. This is the market where giant, large capitalization companies live. This is the market Wall Street hypes ‘til it’s blue in the face.

And, unfortunately, this is the market that most individual investors choose to invest in.

They invest in this market because the investment press, most investment books, investment advisors, and even their friends all urge them to.

This is the market where individual investors end up chasing stocks AFTER Wall Street, institutional investors, and large mutual funds have already driven a stock’s price artificially higher. This is the market that has gone nowhere for the last decade and destroyed the nest egg of tens of thousands of investors.

Following the herd into this market is the biggest threat to your wealth today...

Rule #1: Why You Shouldn't Buy Any Stock in the S&P 500 Index

You see, almost everything you read is authored by, influe

nced by, or in the interests of institutional investors. Yet the needs of institutions and big money managers are far different from your needs.

Wall Street and its hoards of institutional investors are primarily concerned with not doing worse than their competitors, so they focus on the short term becaus

e they want to keep their jobs.

They MUST buy the stock of large companies, like those found in the S&P 500 Index, because smaller companies don't have enough stock to satisfy th

e enormous needs of giant institutions. In fact, many mutual funds have rules forbidding them from investing in anything but large cap stocks.

This, coupled with a short-term focus leads the institutional marketplace to make very different decisions about buying and selling stocks than any rational long-term individual investor would make. In a nutshell, the performance of any large cap stocks you may own are subject to the whims and control of big institutional investors.

Here's the game they play. The large institutions and brokerage houses tout these large companies because they underwrite them and mus

t continue to support them because they have a vested financial interest in driving their stock price ever higher. So they push them to individuals like you and me - just before the floor falls out.

In this market, you are a pawn in Wall Street's big money game. That's just one of the reasons we advise investors like you to avoid large cap stocks like those found in the S&P 500 Index.

But there is another market. A market we have mined successfu

lly over the last 10 years to deliver a stunning 430% return while the S&P 500 returned just 30%. I'm going to tell you about it in just a moment, but first let me tell you why you should ignore everything you think you know about asset allocation.

Rule #2: Ignore the Asset Allocation Myth

If you've ever opened a financial magazine, talked with a broker or financial planner or listened to any financial "expert" on TV, you've surely heard the typical asset allocation recommendations.

They'll say something like: at age 50 you should be 10% in cash, 25% in bonds and 65% in stocks (divided among different capitalizations, different countries, value versus growth, etc.).

Those of you, like me, who have been around for a few years may remember Adele Davis, the famous nutritionist. When she lectured she would invariably get questions like "How good are fruits and vegetables for me?" and she would reply: "Which fruits? Which vegetables?"

Along those lines, when it comes to generic asset allocation recommendations, I would say: "Which stocks, which bonds?" Talking about allocation without knowing which stocks and which bonds is meaningless.

Show me a portfolio with 65% in a stock index fund and 35% in a bond index fund, and I will be able to show you a 100% stock portfolio that is less risky and a 100% bond portfolio that is more risky!

Same goes for the hogwash you hear about growth stocks versus value stocks as an allocation consideration.

Come on now! Someone has gone to the trouble of dividing all stocks in half, based on various criteria and calling half of them value and half growth. And then they suggest you divide your holdings according to this definition.

I am a value investor, and by my criteria, not more than 15% of the stocks out there should be termed value stocks. I have friends who are momentum investors and they wouldn't call more than 15% of the stocks growth stocks. If you're diversifying using all those stocks in the middle, you may not be diversifying at all.

Since we are on the subject of risk and diversification, let's take a moment to discuss one more of those rules for protecting your portfolio in today's turbulent times.

Rule #3: Avoid These Mutual Fund Traps

We recognize that many investors do not have the time to manage portfolios of individual stocks or bonds so they turn to mutual funds.

But all too often, they invest in the "me too" large-cap funds that pull you into the institutional market. A market that we've already illustrated is bad for the individual investor.

Index funds are another popular choice, but they too are riskier than you think!

It may seem strange to you that a portfolio of 500 stocks would be riskier than a smaller portfolio of stocks chosen for risk reduction. But consider this: In the S&P 500 index, the top 10 stocks account for 21% of the portfolio.

On top of that, many of the largest stocks are in the same industries - further reducing diversification and increasing risk. Remember all the financial stocks that imploded over the past few years? And the tech stocks before that?

And index funds are among the best of the funds investing in large companies. Most other funds have the same problems, plus higher management and transaction costs.

Now, mutual funds DO have a place. But your focus should be on funds that concentrate on risk reduction or small and mid-cap stocks or funds that have a truly unique approach. Helping investors like you uncover funds that do just that is one of the many things we do. Our easy to follow model mutual fund and ETF portfolios safely keep you out of the institutional marketplace and serve as a quick guide to the kinds of funds you should be paying attention to.

You can get complete unlimited access to these portfolios free - I'll tell you how in just a moment. But first let's talk about the biggest threat to your wealth today...

Rule #4: Protect Yourself from the Biggest Threat to Your Money Today

Investors are faced with a daily barrage of business news. There's keen competition over who can break the story first. Who can come up with the "catchiest" headline.

The clear inference is that the news matters - that keeping abreast of the news, especially as it relates to one's holdings, is one of the keys to investment success.

I disagree. In fact, today's 24-hour financial news cycle is one of the biggest threats to your long-term investing success - especially in today's volatile market! Almost everything the daily media reports on from an investment perspective is guesswork, speculation or hype. This-never ending reporting cycle causes many investors to make decisions at the wrong time and for the wrong reasons. Regrettably, institutional money managers know this and appreciate the fact that the investor's missteps help them build profits - day in and day out.

As an investor, you only need to pay attention to the handful of true big surprises that are reported on over the course of the year. Not the never-ending flood of routine daily news that is insignificant and meaningless in terms of real impact to your portfolio.

In truth, most news only serves importance for PR firms, journalists, day traders and TV reporters because it gives them a means of making a living. But to the long-term investor like you, it is little more than filler and noise.

What makes the impact of news even more nebulous is this: There is almost always both good news and bad news about a stock. In addition, the news story itself almost always has both a positive and negative aspect.

It is a myth that what's reported by the financial media is factual. Over the years we have been conditioned by Wall Street and the financial media to believe that stocks move up and down for identifiable and reportable reasons. What passes as facts are likely guesses that may or may not be pertinent to a particular stock or the direction of the overall economy. What can be said with confidence is that the one thing that is not random or irrational about the market's performance is its basic, underlying, 100-year entrenched uptrend.

A Smarter Way to Invest
(Beat the Market 14-to-1)

Over the last 10 years, AAII has used the investing rules in this report to deliver a stunning 430% return while the S&P 500 returned just 30%. We did it by ignoring the herd mentality on Wall Street, and instead investing in the "other" stock market.

This market is made up of companies with small to medium capitalizations and solid underlying values. There are none of the sluggish large-cap stocks that the institutions are stuck with. There are also none of the start-up companies without earnings that are only suitable for venture capitalists.

It's the market where "Shadow Stocks" live.

Rule #5: Use Shadow Stocks — The Secret to Beating the Market

If at the end of 1940 you had invested $1,000 in the stocks of the S&P 500, you would now have $1,330,777 (reinvesting dividends and ignoring taxes). Not bad.

But if you had invested the same $1,000 in Shadow Stocks, you would now have $13,798,707!

Shadow Stocks are small-company stocks with underlying values that are overlooked by institutions and not covered much by analysts. And they can make a truly life-changing difference in your investing results.