Exchange Traded Notes. It has current exposure to the GSCI [GSP]. But Barclays is going to come out with another ETF later [GSG] without the debt note risk of the company. Barclays Files for Exchange Traded Note for Oil - How It Differs From The ETF - Seeking Alpha

The GSG is an ETF that I've been waiting for. The only other equity that mirrors against the Goldman Sachs Commodity Index (GSCI) is QRACX, which is closed to investments right now and requires a high minimum investment. Diversification into commodities will become a valuable tool because it has been proven to be correlated with inflation. ETFs » New iShares GSCI Commodity Trust - Key Points To Understand (GSG, DBC)

This is an interesting article on a topic that many people do not understand. It's worth a look. ETFs » Asset Allocation: Finding Your Risk Level

When reading through Asset Allocation: Balancing Financial Risk, The Intelligent Asset Allocator, A Random Walk Down Wall Street, and The Only Guide to a Winning Investment Strategy You'll Ever Need, I don't ever recall any information about mid-cap indexes or stocks. In all of these books, they always categorize stocks in two flavors: "large company stocks" and "small company stocks". In fact, if you ever took a look at the Russell 1000 index structure, #201 to #1000 of the Russell 1000 index are mid-cap stocks that are in the Russell Midcap Index as classified by them. You can see the visual comparisons here.

I guessed that mid-cap stocks didn't fit in either of the extremes of the risk/return spectrum. Some stars of the small-cap would eventually rise up as large-cap stocks, while large-cap stocks that sunk would drop to the small-cap region. Therefore, the mid-cap area is just a transitional stage in a company's development. That was my conspiracy theory.

I did some research on the Internet and found a very good reason not to invest in mid-cap indexes/stocks. In Of Markets and Barbells by William J. Bernstein, he gave some statistical evidence on why you shouldn't care much for mid-cap stocks. The weaker correlation isn't significant nor is the return.

So, in terms of ETFs/Index Funds, you should allocate between the Russell 1000/S&P 500 and Russell 2000 and ignore the Russell Midcap and S&P 400 Midcap completely.

For a while, I never understood why William Bernstein has a preference to Vanguard index funds over exchange-traded funds (ETFs). He made noticeable mentions about Vanguard index funds in The Intelligent Asset Allocator and The Four Pillars of Investing and makes recommendations of using their funds for your asset allocation. Even though The Intelligent Asset Allocator was published in 2000, his updated and less technical The Four Pillars of Investing (which targeted toward a more general audience than an academic audience) was published in 2002 with a very brief mention about ETFs.

Now, when surfing along the net, I came across an interview with William Bernstein in Smart Money in an article called The Pro Shop: Monkey Business. He actually explained himself that he preferred Vanguard index funds slightly over exchange-traded funds. Though, he thinks that Vanguard index funds and exchange-traded funds are very much better than the average mutual fund and that mutual funds are much better than managed brokerage accounts. So, his bias toward Vanguard index funds wasn't as high as what many of us believed. In the article, he even recommended the iShares EAFE Value Fund (Symbol: EFV) over Vanguard's International Value Fund (Symbol: VTRIX).

Now, why does he prefer Vanguard index funds over ETFs? Basically, his reason was structure, the ability to trade in and out. It makes sense to me right now. Since ETFs can be traded and priced accordingly all day without any restrictions, you can buy one week and sell the next at the cost of trading commission. If you did the same with a Vanguard index fund, you would face a 2% redemption fee if you sold your fund within 2 months of your purchase. Additionally, Vanguard index funds Net Asset Value (NAV) are priced once a day, so the average investor won't see the fluctuation in price.

Though, using ETFs has its advantages and a lot of ways are outlined in this free Internet article: A Better Way To Invest: An Unbiased Guide for Individual Investors. To my knowledge, I haven't read Bernstein acknowledging this use of ETFs.

My time is short now, but here are more book to recommend if you want to learn about smart investing. It's called The Only Guide to a Winning Investment Strategy You'll Ever Need : The Way Smart Money Invests Today by Larry E. Swedroe. This book, in particular, gives you some rules about how to allocate your money into the specific classes to give you a diversified portfolio. It's an easy read and it make you easily understand why modern portfolio theory is superior to short-term technical analysis and even long-term 'value' investing.

Whenever I hear someone said that their portfolio is safe because it is diversified, I could only wonder how. In the world of investing, there are many ways to diversify a portfolio: by style (growth vs. value vs. blend), by sector (i.e. healthcare, technology, etc.), asset class (i.e., small-cap, mid-cap, large-cap), and globally (i.e., EAFE, emerging markets). My allocation is a combination of style, asset class, and global. Though, my allocation is not diversified by sector. So, we'll address this topic.

Why don't I diversify by sector?

Sector diversification, in my view, is too close to speculating what sector is hot and cold. First, can you recall what percent of the market is made up of technology? Is that percentage the same at 1999? Allocating by sector is a constant adjustment and readjustment of either what the market is made up of or what is hot or cold. If everyone knew that technology was the sector to dump in 2000, why did whole technology sector drop so much if it wasn't a surprise? I suspect the same might be said for oil right now. We will see.

Additionally, investing by sector would also incur the most fees, since you are constantly adjusting your allocations based on how you analyze the market. It can become an expensive proposition since most investors who diversify by sector would just invest in the sectors they believe will be hot. This can result in a high turnover on your portfolio, where commissions can eat away at gains (or add to losses) that you would incur.

So, my suggestion is to stick to asset class diversification through index funds or ETFs. Whatever sector is hot will be adjusted correctly in these funds. Best of all, you could just analyze risk, instead of becoming an expert in all sectors that can be invested in.

Here are books that have shaped my view of investing:

• A Random Walk Down Wall Street by Burton G. Malkiel
• The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk (for technical readers) or The Four Pillars of Investing : Lessons for Building a Winning Portfolio (for casual readers) by William J. Bernstein
• Asset Allocation: Balancing Financial Risk (for the hardcore financial mind) by Roger C. Gibson

I will discuss what I've learned from these books in the near future and what views I have formed about long-term investing based on these books.