Information worth 1,000 times more than any 'stock pick'...

Editor's note: Our founder, Porter Stansberry, is on vacation this week. Thus, we won't be publishing his regular Friday Digest.

As you know, Porter devotes his Friday Digests to his most important task: Giving readers the opportunity to learn timeless, useful investment knowledge. After all, if you don't know the context that surrounds our research... or how to use it... there's almost no chance you'll be successful.

Although Porter is taking a break, we're still devoting today's piece to learning. This information is far more valuable than a simple "stock pick." Several days ago, we mentioned how Dr. David "Doc" Eifrig, editor of Retirement Millionaire and Retirement Trader, has compiled a huge archive of material that can help folks become vastly better educated about finance, investment, and portfolio management.

Below, you'll find two interviews our financial news and opinion aggregator website, The Daily Crux, has conducted with Doc. These ideas alone will put you ahead of 99% of your fellow investors. We hope you benefit from them...

Anaconda Trading

The Daily Crux: Doc, your advisories – Retirement Millionaire and Retirement Trader – are centered around an idea you call "anaconda trading." Can you define this idea for us?

Dr. David Eifrig: Sure... First, "anaconda trading" doesn't pertain to a particular trading strategy. Instead, it's a framework to think about trading and investing. It's how many of the world's richest and most successful investors grow and protect their wealth.

I realize it might seem like a silly comparison, but I've found the most useful way to describe this approach is in terms of the anaconda. Anacondas are the largest snakes in the world. And they're one of the deadliest, most efficient predators... But they don't hunt like most other animals.

Anacondas don't "zip" around chasing after their prey. They don't get into long battles with them. In fact, they don't hunt in a traditional sense at all.

Instead, they lay around in rivers for long periods of time. They wait for an unsuspecting animal to pass by or stop for a drink of water. Only then do they strike... by slowly wrapping themselves around the prey and holding on until the animal stops breathing. Then, with their large mouth, they swallow their prey whole. It's a unique strategy in nature. They're nature's "cheap shot" artists.

Said another way, anacondas aren't interested in fair fights... They'll only strike when the odds are overwhelmingly on their side. They are nature's "no risk" operators. They take their time waiting for their prey and once captured, waiting for the capture to pay off.

Anacondas can grow to an enormous size because they don't spend much time or energy chasing every animal that comes along.

Crux: How do you apply this idea to investing?

Eifrig: Well, that's how the world's best investors think about buying stocks, bonds, and commodities. They act only when the odds are heavily stacked in their favor. In a similar way, their portfolios can grow to enormous size because they're greatly reducing risk.

If you begin to think about investing this way, you can avoid a huge amount of worry and wasted time, and set yourself up to make extraordinary returns. Like the anaconda, you can rest along the river bank until the right opportunity presents itself.

Crux: Can you give us an example of how you've used this approach?

Eifrig: Sure, a great recent example involves some of the former high-flying technology stocks. These stocks used to be the darlings of Wall Street that everyone had to own. But they're no longer the fast-growing stocks they used to be. They've been tossed aside and forgotten by many investors today.

But what many don't realize is these companies still dominate their markets. They increase earnings year after year after year. They've built up large hoards of cash. Many are even paying dividends now.

But because they're no longer on the radar of many investors, they're now trading at ridiculously cheap valuations. There's no reason a relentless cash-flow generator like Cisco should be trading at nine times earnings. The same can be said of companies like Intel and Microsoft.

This is a perfect example of an anaconda-type opportunity... Where our "prey" is just sitting there and we can make an easy, low-risk "strike" with a high probability of success.

Another great example was late last year when bank analyst Meredith Whitney went on 60 Minutes and predicted hundreds of billions of dollars of losses in the municipal bond market. Muni bonds collapsed in price, but I thought it was a major overreaction... The predictions were factually incorrect. So we were able to buy these bonds at a major discount with little risk, simply by waiting for a fantastic opportunity to come to us.

Crux: How about an example of how this idea applies to shorter-term trading?

Eifrig: One of my favorite ways to use this idea for trading is to take advantage of spikes in volatility. The Volatility Index, also known as the "VIX" or "fear index," tends to rise as stocks fall and investors become more fearful.

The VIX is also used to determine option prices... when volatility spikes, options become more expensive. Yet these periods of high volatility typically don't last long... and as any professional trader will tell you, most options expire worthless.

So when we occasionally see a big spike in volatility, it often makes sense to sell – essentially short-sell – puts on stocks you'd like to own anyway. The ins and outs of selling puts are beyond the scope of this interview, but this is an ideal "anaconda" situation.

One of the best examples of this is the stock crash of late 2008 and early 2009. Investors who were patient and prudent were able to collect a huge amount of low-risk income and pick up some of the world's best companies at absurdly cheap prices.

Crux: Are there any risks or hurdles with "anaconda trading?"

Eifrig: Because it's a framework rather than a specific strategy, there aren't really risks in the traditional sense. Followed prudently, it can only help you. It's a simple idea, but it can be quite difficult for the novice investor to apply consistently. You'll learn patience and discipline.

Few people are naturally wired with the patience required to be successful investors. In fact, it's often just the opposite. Many investors act as though frequent buying and selling is the ticket to huge wealth. Ironically, it's this behavior that ensures the average investor will never build real wealth through investing.

It doesn't help that Wall Street does all it can to encourage this behavior – that's where the commissions are made – and the financial media are constantly talking about the latest hot stock picks.

For most people, this is something they have to work at... a skill they have to build. But it's one of the best things you can do to improve your investing and trading results immediately. I recommend everyone give it a try.

Crux: Thanks for talking with us, Doc.

Eifrig: You're welcome.

Asset Allocation

Editor's note: This second Doc interview from The Daily Crux is one of the most important pieces we've ever published. You may have read it when we published it in the Digest last December… But the information here is so important, we decided to take this opportunity to re-run it…

We believe understanding the concept Doc describes below – known as "asset allocation" – is the single most important factor in your retirement investing success. Porter has called it one of the "two greatest secrets of investing."

Crux: Doc... many investors spend a lot of time and energy trying to pick the right stocks. But one's success as a stock picker actually plays a relatively small role when it comes to increasing wealth through investment... much smaller than the average investor realizes.

A much more important aspect to successful investment is called "asset allocation." Can you explain what this is and why it's so important?

Doc: I'd be happy to. Asset allocation is how you balance your wealth among stocks, bonds, cash, real estate, commodities, and precious metals in your portfolio. This mix is the most important factor in your retirement investing success.

It's 100 times more important than any stock pick. It's 100 times more important than knowing the next hot country to invest in... or what option to buy... or knowing what the housing market is doing... or whether the economy is booming or busting.

I've seen ignorance of this topic ruin more retirements than any other financial factor.

Crux: How can it ruin a retirement?

Doc: Many people have no idea what sensible asset allocation is... So they end up taking huge risks by sticking big chunks of their portfolios into just one or two investments.

For example, I have a friend who had most of her wealth in real estate investments in 2006. When the market busted, she lost a huge portion of her retirement funds.

Or consider employees of big companies that put a huge portion of their retirement money into company stock. Employees of big companies that went bankrupt, like Enron, WorldCom, Bear Stearns, and Lehman Brothers were totally wiped out. They believed in the companies they worked for, so they kept more than half of their retirement portfolios into company stock.

And it's all because they didn't know about proper asset allocation. Because of this ignorance, they lost everything.

I'm sure you can see from these examples that asset allocation is so important because keeping your wealth stored in a good, diversified mix of assets is the key to avoiding catastrophic losses.

If you keep too much wealth – like 80% of it – in a handful of stocks and the stock market goes south, you'll suffer badly. The same goes for any asset... gold, oil, bonds, real estate, or blue-chip stocks. Concentrating your retirement nest egg in just a few different asset classes is way too risky for you. Betting on just one horse is a fool's game.

Crux: This seems like simple common sense... to spread your risk around.

Doc: I agree. But not doing it is an extremely common mistake people make.

Crux: Could you walk us through what asset classes are out there... and what a sensible mix looks like?

Doc: First off, you have one of my favorite assets in the world, which is cash.

"Cash" simply means all the money you have in savings, checking accounts, certificates of deposit (CDs), and U.S. Treasury bills. Anything with less than one year to maturity should be considered cash.

I like to keep plenty of cash on hand so I can be ready to buy bargains in case of a market collapse. Investors flush with cash are often able to get assets on the cheap after a collapse – they can swoop in and pick things up with cash quickly, and often at great prices.

I generally recommend holding between 10%-45% of your assets in cash, depending on your circumstances. In fact, one of the major tenets of good financial planning is to always have at least 12 months of living expenses in cash in case of disaster. If you haven't started saving yet, this is the No. 1 thing to start today.

Next, you have conventional stocks. These are investments in individual businesses or investments in broad baskets of stocks, like mutual funds and exchange-traded funds (ETFs). Stocks are proven long-term builders of wealth, so I think almost everyone should own some. But keep in mind, stocks are typically more volatile than most other assets.

Just like you should stay diversified overall with your assets, I think you should stay diversified in your stock portfolio. I once heard a well-known TV money show host ask callers, "Are you diversified?" According to him, owning five stocks in different sectors makes you diversified. This is simply not true. It is a dangerous notion.

The famous economist Harry Markowitz modeled math, physics, and stock picking to win a Nobel Prize for the work on diversification. The science showed you need around 12-18 stocks to be fully diversified.

Holding and following that many stocks might seem daunting – it's really not. The problem is easily solved with a mutual fund that holds dozens of stocks, which of course makes you officially diversified.

Crux: Let's discuss a few more asset categories.

Eifrig: Next, you have fixed-income securities, which are generally called "notes" or "bonds." These are basically any instrument that pays out a regular stream of income over a fixed period of time. At the end, you also get your initial investment – which is called your "principal" – back.

Depending on your age and tolerance for risk, bonds sit somewhere between boring and a godsend. The promise of interest payments and an almost certain return of capital at a certain fixed rate for a long period of time always lets me sleep well at night.

Adding safe fixed-income bonds to your portfolio is a simple way to stabilize your investment returns over time. For people with enough capital, locking up extra money (more than 12 months of your expenses) in bonds is a simple way to generate more income that a savings account.

Another asset class is real estate. Everyone knows what this is, so we don't need to spend much time covering this. If you can keep a portion of wealth in a paid-for home and possibly some income-producing real estate, like a rental property or a farm, it's a great diversifier.

Crux: Do you consider precious metals, like gold and silver, an important piece of a sensible asset allocation?

Eifrig: I do... But gold and silver, to me, are like insurance.

Precious metals like gold and silver typically soar during times of economic turmoil, so I want to own some "just in case."

But I'm different than the standard owner of gold and silver, who almost always believes the world is headed for hell in a hand basket. I'm a major optimist, but I'm also a realist. I believe in owning insurance. I believe in staying "hedged."

For many years, my job at Wall Street bank Goldman Sachs was to develop and implement advanced hedging strategies for wealthy clients and corporations. The goal with these strategies was to protect jobs, wealth, and profits from unforeseen events.

During those years, I learned a big difference between wealthy people and poor people. Wealthy people almost always own plenty of hedges and insurance. They consider what could happen in worst-case scenarios and take steps to protect themselves. Poor people tend to live with "blinders" on.

So just like I wear my seat belt while driving, I own silver and gold – just in case. For most people, most of the time, keeping around 5% of your wealth in gold and silver provides that insurance.

Crux: That's a great view of gold and silver. So... you've covered five broad categories... cash, stocks, bonds, real estate, and precious metals. Do you have any guidelines on how much of each asset folks should own?

Eifrig: There's no way anyone can provide a one-size-fits-all allocation. Everyone's financial situation is different. Asset allocation advice that will work for one person can be worthless for another.

But most of us have the same basic goals: Wealth preservation... picking up safe income... and safely growing our nest egg. We can all use some guidelines to help make the right individual choices. Keep in mind, what I'm about to say are just guidelines...

If you're having a hard time finding great bargains in stocks and bonds, I think an allocation of 25%... even 50% in cash is a good idea.

This sounds crazy to some people. But if you can't find great investment bargains, there's nothing wrong with sitting in cash, earning a little interest, and being patient. If great bargains present themselves, like they did in early 2009, you can lower your cash balance and plow it into stocks and bonds.

As for stocks, if you're younger and more comfortable with the volatility involved in stocks, you can keep a stock exposure to somewhere around 33%-50% of your portfolio. A young person who can place a sizable chunk of money into a group of high-quality, dividend-paying stocks and hold them for decades, will grow very wealthy.

If you're older and can't stand risk or volatility, consider keeping a huge chunk of your wealth in cash and bonds... like a 75%-85% weighting. Near the end of your career as an investor, you're more concerned with preserving wealth than growing it, so you want to be very conservative.

Crux: Great advice. Any last thoughts?

Eifrig: As you can see from my guidelines, the big thing to keep in mind with asset allocation is that you've got to find a mix that is right for you... that suits your risk tolerance... your station in life.

Whatever mix you choose, just make sure you're not overexposed to an unforeseen crash in one particular asset. This will ensure a long and profitable investment career.

 As we mentioned several days ago, it's extremely difficult to sell information about these timeless "common sense" ideas... ideas that can bring you a lifetime of earning consistent, safe investment gains.

Constructing a fortress portfolio of stock, bonds, and alternative assets – which incurs very few losses – just isn't as sexy as the next big gold stock or miracle cure drug stock. But as we mentioned, Doc's Retirement Millionaire research service is a huge hit with the folks we can convince to read it. We're extremely proud to publish it. We're proud that it received one of Porter's highest Report Card ratings out of all of our newsletters... And we're proud of how Doc has compiled one of the greatest track records in newsletter history.

That's why we are urging our entire readership to take advantage of us...

Take advantage of our 100% money back offer for a subscription to Retirement Millionaire. Even if you don't buy a single recommendation of Dr. Eifrig's, you'll get access to literally hundreds of dollars' worth of educational material on investing, trading, and health. In just the past year, readers have learned about an "inflation hedge" that is much better than gold... how to earn super-safe 15%-20% income streams in the stock market... and how to find the world's most reliable retirement income streams.

Of course, Doc's track record of recommending great investments is the best in the industry... So that's an added bonus. But learning how to view your portfolio from the perspective of a professional investor and trader (Doc spent years as trader for Goldman Sachs) is worth 1,000 times more than any stock recommendation.

We urge you to read – risk-free – through Doc's materials. Take four months if you like. If you don't find an incredible amount of investment insight that only decades of experience can provide... and if you don't think you can benefit from Doc's constant string of safe, high-returning investments... let us know and we'll refund 100% of your subscription. You have nothing to lose... and a lifetime of wisdom to gain. You can take us up on our offer right here, without watching a long promotional video.

 New 52-week highs (as of 4/5/2012): None.

 We truly believe Doc's Retirement Millionaire is a unique product in the newsletter world… On top of the wealth of information he provides on money and investing, Doc has helped countless subscribers with his insights into saving money and protecting your health. (In addition to being an elite Wall Street trader, Doc is a board-eligible eye surgeon.)

If you subscribe to Retirement Millionaire and have benefited from any of Doc's ideas… we'd love to hear about it. Tell us at feedback@stansberryresearch.com.

Regards,

Brian Hunt

Delray Beach, Florida

April 6, 2012