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This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.

The headline needs a caveat: some rich people did invest in complex instruments they didn't understand.

They are no longer rich.

Hedge funds are a perfect example.

Few people really understand them. They are not regulated. It is difficult to figure out what they are investing in. It is even more difficult to determine if they have deviated from their original investment strategy.

They promise big returns without additional risk.

Many investors and even pension funds fell for the pitch.

Few took the time to look at the data.

One study of 1,917 funds found that only 17.7% beat their benchmark.

Hedge funds are imploding at an alarming rate. One site that tracks hedge fund failures reports that, since mid-2007, 95 funds managed by 58 firms have blown up.

This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.

All information about listed companies is public. It is widely and instantly disseminated. This information is studied by millions of investors, who establish the price of a given stock based on this data.

Many of those looking at this data are professional analysts. They are well trained in finance and have access to powerful computer programs that assist them in crunching the numbers.

There is one piece of information they don't know: tomorrow's news.

Future events move stock prices. The market has already discounted for current news.

Because no one knows tomorrow's news, many "sure bets" turn out to be losers. Fannie Mae, Lehman, and Bear Stearns are recent examples. Past failures of top-rated stocks include Worldcom, Enron, Bethlehem Steel and Polaroid. In fact, of the 500 companies that made up the S&P 500 in 1957, only 74 of them were in the index in 1997.

Here is the real kicker: Only twelve of those companies outperformed the S&P 500 index in the period from 1957-1998.

This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.

What if you went to Las Vegas, sat down at your favorite slot machine, and very time you dropped in $1, you got back $2? I'll bet you would never leave!

This is the holy grail. Great returns without any risk.

It doesn't work that way in Las Vegas. Why do you think investing is any different?

The foundation of returns is risk. The higher the risk, the greater the potential for returns -- or for losses.

You can achieve returns without risk. However, to do so you need to invest in what are known as "risk-free" investments. These include FDIC-insured Certificates of Deposits and Treasury Bills.

The problem with "risk-free" investments is that they generate relatively low returns. The historical returns of Treasury Bills is 3.7%. After inflation and taxes, there is little profit remaining.

Most people want higher returns than they can get with "risk-free" investments. To do so, you need to invest in the domestic or foreign stock markets (preferably both) and in bonds, which can vary in terms of safety.

This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.

Bad news sells. Good news is boring.

Inside media types will tell you that they are guided by this basic rule: If it bleeds, it leads.

The financial media is no exception.

There is a steady drumbeat of news about a "deep recession" or even another "great depression." How many times in recent months have you read about the "market crash" or the "financial meltdown," all meant to convince you that it really is different this time?

Is it really?

In September 1998, Newsweek carried a major story about an "unprecedented" worldwide "economic convulsion."

Fortune predicted "a fundamental change in the world's economic condition" in September 1998. Time Magazine, in June 1970, opined that we were in "the worst economic conditions since the Depression."

A "panic on Wall Street" was headlined by the Philadelphia Inquirer in October 1987.

The list is endless.

This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.

Everyone understands that coin flipping is random. You can flip five heads or tails in a row and no one would believe that you are an "expert" coin flipper.

What about fund managers who have five years of stellar performance? You see the ads every Sunday hyping their superior returns.

A closer look at the data indicates that these managers are no more skilled than the lucky coin flipper.

One study looked at the performance of the top 100 fund managers over an eleven year period. Only 14% of them were able to repeat their performance in the following year.

There are many studies demonstrating that there is no reliable way to predict the performance of fund managers. This is why you always see the disclaimer that "past performance is no guarantee of future results" in advertisements for mutual funds. It's put in small type so that you won't pay much attention to it.

Here are a couple of examples (there are hundreds more):

Bad markets bring out "financial experts" in droves. Bad news is great for the media biz. All that confusion and panic. What a wonderful opportunity to "help" beleaguered investors understand what is going on.

What's the quality of the advice so freely given?

Historical data is not predictive, but at least it's factual. The musings of talking heads is often inaccurate, not predictive and rendered in a historical vacuum.

Here's some data that may help you sort out the mess we're in.

2000-2002 was the worst three-year period in the last thirty-eight years for both the large U.S. equity markets and the non-U.S. equity markets.

The aggregate loss for large U.S. equity stocks was 43.07%. For non-U.S. stocks it was even worse: 51.55%.

But look what happened from 2003-2007. U.S equity stocks increased in value by an aggregate of 65.57%. Non-U.S. stocks gained 109.92%.

Investors who panicked lost big. Those who stayed the course profited handsomely.

When you look at smaller sectors, the pattern is the same: Big losses were followed by big gains.

In 1973-1974, small U.S. equity stocks lost 50.8%. But in the following two years, that sector gained 110.2%.

In 1997-1998, commodities lost 49.8%. In the following two years, it gained 90.2%

In every major asset class, there has never been a sustained period of big losses where the markets have not recovered and rewarded patient investors with significant gains.

I can't predict the future. But it makes sense to understand the past.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books 2008).

This post is a follow-up to an earlier post by retirement expert Dan Solin on what you should do with your imploding 401(k) plan.

If you are retiring in ten year or less, I can understand how worried you are about the value of your 401(k) investments. Many employees tell me they can't bear to look at their statements.

Here's what to do if you are going to depend on your 401(k) for living expenses when you retire.

In the investing world, ten years is a long time horizon.

I looked at 481 monthly rolling ten year periods over fifty years, from January, 1958 to December, 2007. If you were fully invested in a globally diversified portfolio of stocks during that time period, how many ten year periods do you think you would have had negative returns?

How about never!

The average annualized returns of this portfolio were over 13%. The lowest returns were still over 5%.

I appreciate that historical data is not predictive of future returns and it may well be that it is "different this time," but those are pretty impressive facts.

If you are persuaded by this data, the asset allocation of your 401(k) should have 70%-100% stocks with the balance in bonds.

As retirement nears, you will have to make adjustments to your asset allocation, because your tolerance for risk will diminish. Here are some good rules of thumb.

When you are seven years from retirement, reduce the stock portion of your 401(k) to 60% or less. The average annualized returns for this portfolio were in excess of 10%. The worst returns were in excess of 2%.

When you are five years from retirement, reduce the stock portion of your 401(k) to 35% or less. The average annualized returns for this portfolio were in excess of 8%. The worst returns were in excess of 3%.

If you have less than 4 years from retirement, you have a dilemma.

The only way to keep pace with inflation and taxes is to have some exposure to the stock market. Many pre-retirees and retirees are understandably concerned about market volatility. They invest in "risk-free" investments like insured CDs and Treasury Bills. These investments currently pay low interest rates, virtually guaranteeing a loss after inflation and taxes.

Many financial planners believe that pre-retirees and retirees should have at least 35% (or more) of their portfolios invested in stocks at all times.

If you follow this advice, remember that you may have to hold on during stomach-churning bear markets like the one we are currently experiencing.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008)

Investors are scared. The value of their portfolios has plummeted. Now many are seeking safety instead of returns.

If you are one of those investors, you need to understand the different levels of security in the options available to protect you.

But first, ask whether capital preservation is really the right goal for you.

If you anticipate needing 20% or more of your assets within a five year period, you should not have any exposure to the stock market. You need the confidence of knowing your money will be there when you need it. You cannot afford the kind of market volatility we are experiencing that could cause you to sell at a loss to pay living expenses.

You have a number of choices outside the stock market. As with all investments, you are rewarded for taking risk. Remember: The most secure choices will pay the lowest interest.

The liquidity crunch is having unprecedented ramifications in markets that were traditionally regarded as very safe. Many financial experts now regard only cash and debt secured by the full faith and credit of the U.S. government as really safe.

Let's see if I can touch on your worst fears:

A collapse of the banking system and the insolvency of the FDIC is surely among them.

The Comptroller General advised the Senate Banking Committee that both were likely in April, 1991.

An "unprecedented" worldwide "economic convulsion" -- Newsweek used the quoted language in September, 1998.

A fundamental change in the world's economic condition. Fortune reported on that view in September, 1998.

The worst economic conditions since the Depression. Time made that observation in June, 1970.

Investor "shock felt round the world" was breathlessly reported by Time in November, 1987, complete with a story about a trader who withdrew $100 from his ATM because it gave him "a sense of security."

Pillars of the NYSE crumbling from the onslaught of a huge bear graced the cover of Newsweek in September, 1974.

The triple whammy of "inflation, recession and a frantic bear market" was reported by Life magazine on the cover of its June 5, 1970 issue.

The report gave WaMu three stars (out of five) and advised investors to "hold" the stock. Its three star rating meant "total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis."

While the report noted that the risk of the stock was "high," it set a twelve month "target price" of $4 and justified its projection with some very sophisticated reasoning involving price-to-book multiples.

The analyst predicted an "increase in net margins in 2008" and noted that WaMu was likely to "... benefit from an improving yield curve, the addition of higher-yielding credit card receivables, and the repositioning of its balance sheet, which included the sale of low-yielding loans and securities."

On September 25, 2008 -- one day after this report was issued -- the FDIC seized WaMu and sold its banking assets to JP Morgan Chase (NYSE: JPM) for $1.9 billion.

WaMu closed yesterday at $1.69. It is likely shareholder value will be destroyed.

I am sure there are many instances where Standard & Poors and other analysts got it right. But the inability of its analyst to look a mere twenty-four hours into the future and see total disaster is a prime example of why investors need to fundamentally change the way they invest.

The concept of studying the markets to find inefficient pricing in any particular stock has little credible evidence to support it. Part of playing this game involves reading analyst reports, listening to the financial media and relying on brokers and advisors who claim to have a skill that does not exist.

This elaborate dance continues because there are so many financial interests that benefit from the process.

Unfortunately, yours is not among them.

Dan Solin is a Registered Investment Advisor and the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).

For the fifty million Americans with 401(k) plans, these are troubling times. The turbulent markets and steady stream of really bad news have caused assets in these plans to plummet.

So what should investors do to protect their retirement nest eggs?

This question, endlessly debated by financial pundits, indicates a fundamental misunderstanding of both 401(k) plans and investing.

By their very nature, 401(k) plans are long-term investments for the vast majority of those who have them. Distributions cannot be taken without penalty until you reach age 59 and a half.

The focus of plan participants should not be on what happened to the value of their plan assets on Monday. They should be concerned with the money in their plan when they will start taking distributions from it. For a 35 year old, this is more than two decades into the future.

Speculators react to short-term volatility by buying and selling. Long-term investors focus on their asset allocation and staying the course.

If you have the right asset allocation, and you are properly invested, the current unstable market conditions should not cause you to stray from your course.

In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.

Among the settling firms were Citigroup (NYSE: C), UBS (NYSE: UBS), JP Morgan Chase & Co. (NYSE: JPM), and Morgan Stanley (NYSE: MS).

Their conduct was so bad that former Attorney General Spitzer agonized over whether to indict them for criminal conduct.

The industry unleashed a massive PR campaign. It convinced you that it saw the error of its ways. They had "reformed." You could trust them again with your hard earned assets.

And you did. Money flowed back in the coffers of these firms and others.

That was the first time.

This is the part of a series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Your broker talks. You listen. At least that is the way it is for most investors. You assume (and she definitely assumes!) she has an expertise that will help you maximize your returns. Sometimes, you almost feel like you should be taking notes.

Based on my experience, this is often not the case. Brokers are not required to have any background in finance or economics and their training is focused primarily on sales.

I thought it might be interesting to turn the tables. Here are some questions you should ask them.

Question #1: What is the most important factor that will affect my returns?

Answer: Your asset allocation, which is the amount of your investments allocated to stocks, bonds and cash. Not stock picking; not mutual fund selection and not market timing. If your broker gets this wrong, get a new broker.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

In these tough economic times the allure of the reverse mortgage salesman to senior citizens (over 62) is hard to resist.

You get cash for the value of your house, which you don't have to repay until you sell your house or die. You can take the cash all at once, monthly or as a line of credit. You can use the money any way you want. No credit checks required.

While reverse mortgages can be a valuable source of cash for seniors, there are a number of problems with them.

The fees are very high. Typical fees for a reverse mortgage on a $250,000 home can exceed $25,000. In addition, interest charges are added every year the loan remains outstanding. While you may not care as long as you get your money, you should realize that the diminution in the remaining equity in your home will affect the money you will receive if you sell your house and the amount of money your heirs will receive upon your death.

Because of these high costs, reverse mortgages are particularly ill-suited for those who intend to remain in their homes for a relatively short period of time.

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Almost everyone has taken a big hit in this bear market. Many investors are tempted to take more risk with their portfolios to make up for their losses.

This is a bad idea.

Your asset allocation, the division of your portfolio between stocks and bonds, accounts for as much as 100% of the level of your returns, according to one prominent study.

Your asset allocation is determined by your ability to withstand market volatility. In large part, it is determined by the amount of time you can keep your assets invested without withdrawing a substantial portion (20% or more) of them.

The fact that you may have lost money in the current markets does not mean that you are able to take more risk. In fact, it may mean the opposite: Your ability to withstand market losses has diminished.

Remember that "risk" means "volatility." When you take on more risk, you are increasing volatility. Volatility is a two way street. It moves both up and down.