Rules of the Game: Don't Quit the Day Job

The other day I got one of those crazy, hopium-filled marketing brochures in the mail. I almost threw it away, but its sheer ridiculousness got me thinking.

The cover contained an almost breathless proclamation: "It's an entirely new way to get a big, fat paycheck every week  -- "without working!"  It's some kind of options trading course. I have absolutely nothing against trading options or stocks or bonds or forex. There are many fantastic traders right here on RealMoney, including my friends Bob Lang and Carley Garner.

What galls me, though, is the notion that any particular methodology can be the ticket out of regular, old work. Also, these implied promises absolutely cannot be made by a fiduciary -- someone who is obligated to act in a client's best interest.

Back in the dot-com era, I knew of a few people who actually did quit their jobs because high-beta growth stocks delivered thrilling returns. They were back at work within a few years.

It's nice they got a little reprieve (assuming they didn't like their jobs, which brings up other problems). But I'm getting a little sick of the "too good to be true" promises from trading promoters.

The implication is: You can beat the market (whatever that means) by using indicators to pick the best stocks, options or currency pairs, or whatever. As you can tell, my first problem surrounds the definition of "the market." If you believe that the market consists of large-cap domestic stocks -- also known as the S&P 500 -- then it's entirely possible to figure out some trades that do better, at least in the short term.

But how can a person possibly trade to beat domestic large-caps, domestic small-caps, domestic small-cap value, developed-world large caps, emerging market value, corporate bonds, international government bonds and high-yield bonds?

Why would you want to do so? The returns from those asset classes are random. In other words, while the S&P is showing a loss, other asset classes may be trading to the upside. And guess what? You can't predict how that will take shape. Research has shown no clear pattern in asset class returns that can be exploited consistently for trading purposes.

What does that mean? It means the case for diversification across broad asset classes is strengthened. It also means the idea of timing your trades to bag huge job-quitting-style wins is usually futile.

Remember that I am not against trading! It's certainly possible to capitalize on short-term inefficiencies in any market. But it's crucial that traders keep their goals in mind, and recognize that tactically allocated, globally diversified portfolios have withstood the test of time.

Investors who adhere to a diversified, structured strategy are better positioned to capture returns of any given asset class, wherever and whenever they occur.

Yes, it's boring. Yes, it means you don't have to stare transfixed at the financial TV channels all day, or have a setup of six monitors to track global markets yourself, day in and day out. And it means that the portion of your assets that you allocate into a structured diversified portfolio won't always beat the S&P in any given quarter or year.

Over time, it will deliver the expected return of the world's markets, which can often outshine the S&P.