Either way (and even if you don’t plan on making either move anytime soon), having a sense of what got us here can keep you from repeating the same mistakes and even help you make smarter financial decisions – particularly when it comes to repairing your portfolio and even growing it in the years ahead.

When it comes to understanding exactly “what got us here,” I find it helpful to review some of the key bits of advice that Wall Street kept pitching to retail investors, a series of widely accepted investment adages that somehow became gospel and that I refer to as “Wall Street’s Biggest Whoppers.”

Let’s take a couple of minutes to look at the Big Five – the five worst offenders from a list that I assure you is actually quite a bit longer:

Wall Street Whopper No. 1: Buy and Hold – It was supposed be a simple proposition. Consistently put money to work in the markets, let it ride – and laugh all the way to the bank. The thinking was that you couldn’t go wrong because the markets would go up 10% to 12% a year – each and every year (It’s actually more like 4% to 6% – on average – but that’s another story for another time.

What’s important to understand is that “Buy and Hope” is the greatest myth foisted upon the American public in the last 200 years – the need for American International Group Inc.’s (AIG) retention bonuses, notwithstanding. As millions of investors have found out the hard way, the markets can – and do – frequently go through tremendous periods of readjustment.

This means that timing, as they say, really is everything. And “they” – the brokerage firms, hedge funds, ratings agencies and others that together make up “Wall Street” – don’t want you to know that. Wall Street wants you all the way into the game all the time. It doesn’t care whether you win or lose, just as long as you keep playing. So the collective “they” work together to pitch you whatever’s hot, and then move on when that investment has run its course.

And don’t even get me started about the conflicts of interest. The supposedly independent ratings agencies that rubber stamped everything from derivatives to high-grade debt have been in bed with the companies they’re supposed to be regulating for years. Consequently, millions of investors thought they had the “green light” to invest in supposedly safe institutions that have proven to be anything but during the past 24 months.

Where the rubber meets the road – especially during the down years like we’re living through now – is that the risks of outliving your money go up dramatically if you have to get out. In fact, if you achieve annualized returns of zero or less for the first five years after you retire, your odds of running out of money in the next 30 years more than double from 26% to 57%, a study from T. Rowe Price Group Inc. (TROW) reported recently.

And that’s proving to be a tough reality for millions of investors who thought they had this handled. Which is why I was not surprised to see data from the Employee Benefit Research Institute quoted in Money Magazine showing that more than 30% of near-retirees, or those in the early years of their retirement, had more than 80% of their money invested in stocks at the onset of this crisis.

Many of those investors have undoubtedly sold off assets to finance living expenses while waiting for the market to reverse. And that’s created a “double whammy” of sorts: Not only did they lose money on the way down; but those losses and the subsequent forced sales could well mean that their portfolios won’t be big enough to benefit from the next upturn when it does arrive.

What to Do Now: As I have long espoused, the notion of being able to take on more risk simply because you have more time isn’t what it’s cracked up to be. Instead, it is far more appropriate to make choices based on the certainty of returns, especially now.

And that should start with how you think about dividends and reinvestment. In short: Boring never looked so good. Data from Wharton’s Jeremy Siegel and Yale’s Robert J. Shiller – not to mention from my own research – shows that dividends and reinvestment can be far more stable contributors to overall wealth creation than capital appreciation.

Looking ahead in uncertain times, the best choices remain those businesses with solid management, plenty of free cash flow, and an increasing dividends that are backed up by unstoppable global trends. Not overpaid, arrogant Wall Street executives who engineer risk under the guise of safer returns.

There are still plenty of choices available if you do your homework. And it’s not too late to begin buying them selectively right now. In fact, as I wrote recently, history suggests we’re nearing a once in a lifetime buying opportunity so the odds of an upside move could arguably outweigh additional downside…even if you don’t quite get the bottom right.

Wall Street Whopper No. 2:  Some Debt is Good (aka: The Careful use of Debt is an Appropriate Wealth-Building Tool) – This is one of Wall Street’s biggest and most dangerous whoppers, and yet I almost hesitate to include it because of the e-mail I know it’s going to generate. But at the risk of sounding like a broken record, if you owe somebody money, you’ve still got to pay it off one day. That means any growth you attribute to debt until it’s paid off in full exists only in fantasyland. Ask General Motors Corp. (GM), Lehman Brothers Holdings Inc. (OTC: LEHMQ), or any one of the dozens of world banks that are now coping with the aftereffects of growth through the supposedly “intelligent” use of debt.

And this is just as true on a personal level as it is on a professional and governmental level. I wish our leaders understood this, although – in their defense – they finally seem to be getting the picture in recent weeks. Better late than never, although I would just as soon not have seen millions of investors taken on a white-knuckle ride to begin with.

Perhaps the saddest thing of all – and one of the most important lessons we can learn – is that the lessons we grew up with no longer seem to apply. We were taught that if we worked hard and acted responsibly, we would flourish. But now, even if we were responsible, we’re finding out that we’re now liable for the “other” guys’ debts, too.

What To Do Now: From an investing standpoint, confine your choices to those companies with little or no debt. Steer clear of the ones that are on the U.S. Federal Reserve’s IV drip. Yes, those companies probably have upside, but the real test will be what happens when they are forced to wean themselves off their Fed-administered drugs and operate without the crutch of government financing. History suggests that many will fail – despite the government’s unprecedented efforts to save them.

On a personal note, borrow conservatively and only if you have to. Pay off your credit cards each month or shift to a cash-only, “pay-as-you-go” spending plan if you can’t keep that spending under control. Refinance your house before interest rates begin rising dramatically to cope with the almost-certain after-effects of current stimulus spending. And by all means make sure that whatever debt you take on is debt you can afford to pay off.

Wall Street Whopper No. 3: It Pays to Diversify – The conventional wisdom used to be that if you spread your money around, you’d somehow be safer. This is no more effective than rearranging the deck chairs on the Titanic. It’s better to get off the boat.

In uncertain times, it’s how you concentrate your money that matters. This is an important adjunct to “investing with certainty in uncertain times,” and I’ve long advocated the benefits of stability and consistency as a means of getting ahead of the game – and staying there.

The proprietary 50/40/10 (Base Builders/Global Growth & Income/Rocket Riders) portfolio structure we utilize in our monthly newsletter, The Money Map Report, is a terrific example of what I mean. Not only does this portfolio strategy instill a discipline that forces investors to adhere to a “safety-first” philosophy, it has also proved itself to be far more stable than the broader markets since the credit crisis began. It kicks off higher-than-average income, demonstrates lower-than-average volatility – and still generates all the upside you can handle.

This safety-first discipline, with its dual emphasis on high current income and long-term appreciation, has generated some truly impressive returns.

And t his brings me to a key point: Far too many investors don’t understand how the game must be played right now. They think that investing in rocky times is an all-or-nothing equation.

It’s not.

Instead, it’s about the continual adjustment of positions to reflect changing assumptions related to risk – especially now that the risks of stock ownership have changed.

What To Do Now: In an era of simultaneous collapse, when then stock, bond, housing and credit markets have cratered at the same time, there’s simply no excuse for not hedging your portfolio at all times, not just when it’s popular to do so. Nor is there any reason why you shouldn’t be thinking safety first. That way you have the freedom to screw up on speculative bets instead of being dependent upon them to regain what you lost on foolish moves made during the downturn.

And by all means, learn how to use any of half a dozen specialized tools – like inverse funds, or options – to make low-risk, but-often-spectacularly-profitable choices, even under current market conditions. That way you can plan for the worst , yet still obtain the best of what’s out there.

Wall Street Whopper No. 4: Your Home is an Investment – No, it’s not. At best, it’s a roof over your head that keeps you from being priced out of the local rental markets. At worst, it’s a money pit that provides you with the illusion that you’re doing something sensible with your hard-earned money – despite the fact that an entire industry would have you believe otherwise.

Research from Shiller, the Yale economist, shows that, since 1900, home prices have run sideways or even declined for long periods of time. That means that – except for two steep run-ups – one after WWII and the other as part of the late 1990s lending binge – real estate hasn’t been the winning investment everyone claims it to be. And millions of people are learning the hard way that real estate can, and does, lose value. Seems they’ve conveniently forgotten the lessons Texans in the oil patch learned in the early 1980s or that Japan experienced in the 1990s.

Wall Street Whopper No. 5: Shop ’till You Drop and Save the Economy – The U.S. government wants you to spend money. And Wall Street, together with the credit card companies, want you to save their sorry hides by helping you do just that. That’s why so much of the stimulus planning – if you can call it that – revolves around tax cuts and handouts. It’s all window dressing.

Nothing – and I mean nothing – will matter until the banks start lending again.

Period.

What To Do Now: Keep your powder dry. History shows that the ebb and flow of money has never been smooth. Ever.

So to talk as if what’s happening now is an enigma is to ignore the past. We’ve been here before. There was the Panic of 1873 (sometimes called the “real” Great Depression), the Great Financial Crisis of 1914, and the Banking C risis of 1931, for example. The reason what we’re living through now feels different now is that those events are simply beyond the living memory all but a precious few people.

But take heart, for there are some bright spots to look to.

America’s safe-haven mantra – misguided though our policies may be – is an important indicator that savvy investors should plan for an eventual rebound – even if we’re destined to test new lows in the months ahead, and even if we have to look outside our own borders as a part of that process.

Source: Five Wall Street Whoppers And Why You Need To Know Them

And in his first installment of a new series, he shows you exactly how you can do that with low-minimum mutual funds.

Just this week, a friend told me that he wanted to jump-start his long-neglected saving-and-investing efforts, but was worried it wouldn’t be possible on his current household budget.

I’d be willing to bet that a lot of folks are asking that very same question right now.

I mean, let’s face it: Everyone knows how important it is to save money. But in the middle of what may well be the worst U.S. financial crisis since the Great Depression, finding the cash to create an emergency fund – or to invest in a mutual fund that requires a $10,000 initial outlay – can appear so daunting that many investors decide to not even bother.

Don’t that same mistake.

There’s an option: Mutual funds with a low initial investment threshold. We all know, for example, that Vanguard Wellington (VWELX) is a great fund – indeed, it’s a favorite of Money Morning Investment Director Keith Fitz-Gerald – but here in the depths of a financial crisis, not everyone has the $10,000 in cash needed to become a new shareholder.

The upshot: Unfortunately, a lot of folks stop right there, and don’t bother to jump-start their saving-and-investing program.

Don’t that same mistake.

When a Small Start is a Good Start

One way around is to seek mutual funds that allow investors to start with either a very small initial investment – or with no initial investment at all (provided you’re willing to let the fund company take $50 or $100 a month directly out of your checking or savings account).

This approach has a couple of advantages, Money Morning’s Fitz-Gerald says:

• First, it induces you to keep investing, even in a bad market, which history shows is a key element of better long-term results.
• Second, by taking advantage of the electronic-investing option many fund companies offer, you’re investing consistently – for instance, investing the same amount of money on the same day each month.
• Third, for the ultra-cautious the lower investment thresholds can serve as a de facto risk-management tool, since it means that you’re putting less money at risk in the market at a time when the market is uncertain (although, at the same time, you’re still investing).

“It’s a way to insure that you continue to invest, even when the markets stink,” Fitz-Gerald says. “If you are gun-shy, and don’t really want to put a lot of cash at risk, this is a good way to continue your forward-investing momentum, to continue even when the markets aren’t optimum.”
Where do you look for funds like this?

One good place to start your search is with Morningstar, the noted financial-products researcher. For some help, we turned to Morningstar.com’s handy mutual fund screener. And here’s what we did. We looked for funds with an initial purchase of $500 or less. Not wanting big chunks of our capital to for sales commissions, we set the “load” status to “No-Load Funds Only.” And we opted for low-expense offerings, meaning we screened for funds featuring expense ratios of 1.00% or less.

Wanting to cull this further – and to hopefully end up with the “best-in-breed” funds – we limited our search to funds that were rated as “five-star” products by Morningstar. Lastly, since we’re looking chiefly as equity funds in this exercise, we ran one screen for domestic stock funds and another for international stock funds.

We ended up with 23 funds in the domestic-stock category and 16 funds in the international stock category.

What this demonstrates is “that there are quality funds out there,” even for investors who have smaller amounts to invest, Fitz-Gerald says.

Morningstar’s mutual fund screening program – which is free – allows for investors to include other parameters, too, including those for risk, returns, portfolio turnover, and management tenure. We were attempting to keep it simple to show what’s possible, and also figured you’d want to do some of your own research to find funds that match your personal financial needs. The program can also screen for bond funds. One task it does not perform is to identify which of the funds are close to new investors.

Go Global or Get Left Behind

The Money Morning graphic shows the results of our search for International stock funds – and for a good reason. As regular readers of Money Morning know, we believe a global investing strategy is key to any investor’s long-term success. Unfortunately, too many investors de-emphasize the international or global elements of their portfolio, believing that domestic investments are less risky.

There are many different kinds of risk, however – including the risk of getting left behind. Long-term, most of the growth that’s expected in the decades to come will be outside U.S. borders.

If you want proof, just ask the World Bank.

• Today, the United States and Asia each account for 28% of the worldwide economy. Combined, that’s a total of 56%.
• Twenty-five years from now, America’s share of the global economic pie will have slipped to 24%. But Asia’s will have soared to 55%.

In short, in slightly more than two decades, Asia will be twice the economic powerhouse that the United States is today.
It’s true that a number of overseas markets have been problem-plagued in recent months. But that’s just a short-term problem. And as the World Bank statistics demonstrate, the long-term outlook for growth outside the U.S. borders is exceptionally strong.

By focusing only on U.S. stocks, you’ll be looking at only a quarter of the world’s investment opportunities. You’ll miss out on some of the world’s fastest-growing markets. And you’ll get left behind.

The greatest growth will come from China, India and the newly capitalist economies of Eastern and Southern Asia. There may be some other growth areas, such as resource-rich Latin America.

Famed Wharton Business School Professor Jeremy Siegel recently pronounced that the long-held conventional wisdom on international investing should be thrown out the window. For decades, we’ve heard over and over how international investments should comprise 5%, 10% or at most 15% of our portfolio’s total value. Any more than that is foolhardy and risky, we were programmed to believe.

According to Siegel, however, the truly foolhardy act is to limit our international exposure that much. In other words, the biggest risk U.S. investors now face isn’t just the possibility of losses incurred when some foreign market plunges. The real risk now is the possibility that U.S. investors face – getting left behind financially because of all the growth that’s expected to be generated beyond U.S. borders.

Investment advisors who stick with the old asset-allocation model are actually doing their clients a huge disservice, Siegel says.

Siegel now believes that international investments should comprise about 40% of your total holdings. Most individual investors know Siegel for his best-selling book, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. The book first came out in 1994, and is considered one of a handful of “must-read’ titles in investing finance. The new edition, which appeared in November 2007, includes a long addition addressing the international arena, and how investors must adapt their strategies to the new realities of globalization.

The nation’s wealthy already really understand what’s at stake and are already profiting from these trends – and in a big way. According to a 2007 study by the Spectrem Group, 40% of affluent U.S. households are continuing to invest internationally, while a full one-third are actually planning to invest more. Their chief country of choice when it comes to investing abroad: China.

Other Options

For cash-challenged investors who want to capitalize on China’s growth, there is a solid option – the China Region Opportunities Fund (USCOX), which is operated by the San Antonio, Texas-based U.S. Global Investors Inc. (GROW). As it does with most of its funds, U.S. Global offers interested China fund investors its trademarked “ABC Investment Plan,” which permits investors to make a $100 initial investment and subsequent monthly investments of $30 a month, so long as the new shareholder consents to an automated electronic transfer. You can even tell the company which day of the month you want the money to be invested.

A number of other companies offer similar programs, which are known in the industry as “automated investment plans,” or AIPs. One other company known for operating quality funds is the Baltimore-based T. Rowe Price Group Inc. (TROW), a firm I covered during my time as a business journalist. With most of its funds, the minimum initial investment is waived as long as you agree to have at least $50 a month per fund automatically transferred from your checking account and invested. That arrangement must be maintained until you reach the specified minimums to avoid any extraneous fees.

(One point worthy of note: When my wife and I bought our house nearly nine years ago, the down payment came from two T. Rowe Price funds that I’d built up over a couple of years solely through AIP investments).

Here’s a list of T. Rowe Price funds of all types that are ranked four and five stars by Morningstar.

One final note about low-initial investment funds: This is a great way to get you started back on the savings pathway. At some point, however, you’ll likely want to either add funds or boost your regular investment total to start amassing capital.

“One thing that investors too often don’t understand: You never want to stop investing altogether,” says Money Morning’s Fitz-Gerald. “Even if it’s only a couple of bucks here and there. History shows that those who continue to invest through thick and thin are those who generate the best returns.”

At least, however, this strategy is a great way to get you started back on the savings pathway. At some point, however, you’ll likely want to either add funds or boost your regular investment total to start amassing capital.

Source: Mutual Funds With Low Minimums Can Put Investors Back on the Winning Path

Editor’s Note: This is the first installment of a new series that will explore sound strategies for investing during the ongoing financial crisis.