Investing For Profits, Part Two - The Easiest Way to Improve Your Results

Would you like a better return on your investments? Whether you have an IRA or a brokerage account, chances are that your money is mostly in mutual funds. Read on to learn more about why this is not the best place for it to be, and what to do instead.

First of all, you should know that this is not the way the rich invest. Or even the large endowments that are tasked with funding universities and other large institutions. They know how important it is to play it safe -- and at the same time they depend on generating a much better rate of return than what is typically the case with mutual funds, the staple of traditional retirement funds.

You may not have millions to invest like they do, but if you've been working somewhere for a significant length of time, you may well have retirement account savings into the six figures.

With that, you should be able to find an investment advisor who is using the very same basic strategies that the rich are using. Those are strategies that promise to provide a significantly better return on your investment than the traditional approach.

What exactly are those strategies? Generally, there are actually a variety of strategies, but they are all designed to produce the highest possible rate of return with the least amount of risk. And they all tend to be strategies and tools that isolate the investors from their emotional knee jerk reactions that might lead them in the wrong direction.

For example, when the market goes up or down, you won't make decisions based on emotions. Instead, the decisions have already been made for you, based on statistical algorithms and formulas. Here's how it works.

1) Formulas and Algorithms

Advisors who operate within that paradigm use formulas and algorithms instead of guesstimates and emotional responses. They're constantly looking at the market and constantly evaluating what is happening. And they generally use very sophisticated computer programs to provide the information they need to make the right decisions.

2) A Different Portfolio

Most wealthy people don't invest in mutual funds and annuities. And neither do advisors who operate according to that paradigm. They invest in stocks and fixed income securities instead.

If you wanted to move into that direction, you would have three parts to your portfolio: An equity portfolio, a market neutral portfolio, and a fixed income portfolio. Coupled with a strategy based on algorithms, this can result in a much higher rate of return with a greatly reduced amount of risk.

3) EFTs

The wealthy invest in equities, and ETFs (electronically traded funds), which are also known as iShares. For example, if you want to buy a basket of the S&P 500, there's an iShare of the S&P 500. So you can buy that particular ETF. Basically, instead of buying the 500 funds, you would buy a basket that represents all of those 500 funds.

4) The Top-Down Approach

Next, they take a top-down approach. They look at equities in large cap, small caps, international caps etc. and that provides a them with broad diversification. Then, they run it through a computer that evaluates the stocks based on more than a hundred different criteria and picks out the 10 to 15 best individual stocks from each of these areas. And those then go into their portfolio.

5) Recession Probability Analytics

Next, there's a technique they use which analyses the probability that there will be a recession coming up. It takes various indices in the market place and evaluates them. It takes the unemployment rate, retail sales, the housing situation, the discrepancy between the money in Europe and here and several other indicators. Using a point system, it then basically answers the question whether being in equities is a good idea at that point in time -- or not. And depending on what the numbers say, the recommended move will be to either stay in equities or move to cash.