Who better is there to educate us about exchange traded funds than Tom Lydon and John Wasik? I chose iMoney Profitable ETF Strategies for Every Investor because of the authors' forthright, conversational style and also because the book is a valuable reference text for the individual investor.

Tom Lydon is the editor of ETFtrends.com and a much sought after contributor to the business channels and the major financial newspapers. If you're not current on what there is to know about exchange traded funds, I encourage you to visit the website. John Wasik is a finance columnist for Bloomberg News and the master of his own blog.

John Bogle is often called the Thomas Edison of the stock index mutual fund. Bogle was the first to truly understand why investors couldn't earn market-based returns. He explains that managers consistently guessed wrong on what stocks to buy and sell while they unselfishly passed those trading costs along to shareholders. Investors who buy into the advertising hype are usually in for disappointment.

The assumption is that the larger a fund is and the better managed a fund is, the lower the costs will be and the better the returns. The statistics bear that fund size has nothing to do with performance. In fact, the managers of actively managed funds have to do a lot of trading to try to produce stellar returns and the costs eat into those returns. Investors are at fault too, because they buy funds at the height of their run-ups and then ride them all the way down.

Exchange traded funds are what I call theme funds; they are specifically designed to track an index. They were launched in the early 1900s but they didn't catch on with investors until a series of scandals rocked the mutual fund industry. Exchange traded funds offer an alternative to mutual funds that you might find enticing.

Exchange traded funds are so named because they are listed on a stock exchange and trade all throughout the day, the same as an individual stock. Check out the average expense ratios: .29 percent for U.S. fixed income ETF, .41 percent for a U.S. stock ETF, and only .52 percent for an international stock ETF. Those funds with a correlation factor (or R-squared) of 85 to 100 do track their underlying indexes quite well.

Sheryl Sostarich

Before you load up on exchange traded funds, you need to understand how indexes are created. One fellow to get familiar with is financier, Robert Arnott. Arnott claims to have discovered a method of indexing the market that allows him to pick the best of the winners while avoiding the losers.

Arnott looks at a vast number of fundamental factors including  sales, income, revenues, cash flow, dividends and book value. Rather than focus on the market value of companies, he concentrates on finding companies with the best relative value and dividend payouts.

Because the stocks in his index tend to be bargain priced, he can capture up to 2 percentage points more than an index based on market size. To learn more about Robert Arnott's indexing technique, I recommend his book The Fundamental Index.

The Dow, though a popular index, can actually lead investors astray. This index is comprised of a handful of stocks yet is it viewed by many to represent the entire market. Why should investors pay so much attention to the price action of 30 stocks? How can 30 stocks give us a true indication of the health of the U.S. economy?

The critics point out that the Dow is solely a price-weighted index. If Intel or General Electric have an especially good day, the Dow index could easily mask a broader market that is trending down.

Wharton professor, Jeremy Siegel, is a strong advocate of indexing based on dividend yields. His premise is that companies with the highest dividends are better values because their stock prices are lower. Lower priced stocks are less risky. According to Siegel, the worst mistake an investor can make is to buy growth stocks that are overvalued. Do read up on the Wisdom Tree series of index funds if this fundamental approach appeals to you.

Sheryl Sostarich

When Tom Lydon started Global Trends Investments in 1996, he had two major goals. His first task was to identify market trends domestically and overseas and invest in nations with growing economies. In determining the optimal mix, he recognized that domestic and foreign markets do not move in sync nor do they decline to the same degree. His second task was to identify market trends using the 200-day moving average and invest only in those markets that were above their trend lines.

More than half of the global market capitalization lies outside the United States. Yet many investors and advisors won't even consider an international allocation greater than 15 percent because it is just too risky. The United States hasn't been the leader in economic growth for some time yet China is expanding at 11%, India at 9%, Argentina at 8% and Brazil and Taiwan at 5%.

The standard of living is rising and you can't ignore the fact that the middle class is growing in China and India. What I like to see are upgrades in the debt ratings of commercial paper in countries like Brazil because this makes capital investment more affordable and ultimately leads to greater infrastructure spending.

As for the risk factor, an investor has ways of monitoring an overheating economy with signs like rising wages and increases in the cost of living indexes. The beauty of exchange traded funds is that they are liquid and, in many cases, optionable.

It's easy to check whether a fund is trading at a premium or discount to its net asset value by viewing the performance data in Barron's or by viewing funds data at www.etfconnect.com. By all means you should avoid funds with high expense ratios. This can cause up to a 2 percent tracking error, which is a huge variance between an ETF and its underlying index.

Sheryl Sostarich

Currency investing was primarily a market for hedge funds and banks until the advent of exchange traded funds. Rydex was the first to launch a currency ETF in December 2005. A year later there were fifteen such funds and many more would follow.

It is very hard to predict which way currencies will fluctuate. One thing is certain, if a currency loses value relative to other currencies, it's an inflationary sign. The world's currencies are constantly shifting in value though their moves are in no way linked. If the U.S. dollar rises one day, it has no bearing on whether the yen falls or rises that same day.

Many factors affect the value of currencies with the two most prominent factors being political conditions and economic climate. Before investing in any currency market, it's wise to find out 1. What form of government (dictatorship, communist, or democracy) is in power and who controls monetary policy? 2. Is the government stable? 3. Is the country open to free trade or is it protectionist?

A strong economy will have a positive influence on a nation's currency. Investors need to ask 1. Is inflation rampant or contained? 2. Does the government operate with a trade surplus or a deficit? 3. Are interest rates rising or falling?

Currency ETFs operate with different tax rules than other types of ETFs. Interest income and gains are taxed as ordinary income, not at the long-term capital gains rate.

The president of EverBank World Markets, Chuck Butler, warns investors not to have more than 20% of their net worth in a foreign currency. The favored approach is to buy a fund that indexes several currencies.

As a rule individual retirement accounts don't permit currency trading. Investors can own a currency fund within an IRA without violating the rules.

Exchange traded funds are now be launched with leverage characteristics that make them twice as volatile. The Double Short Euro Fund (ticker: DRR) is for investors who believe that the euro will decline in value relative to the U.S. dollar. It is designed to achieve two-times the leverage of the Short Euro Index. For every 1% weakening of the euro relative to the U.S. dollar, the level of the index will increase by 2%. For every 1% strengthening of the euro relative to the U.S. dollar, the level of the index will decrease by 2%. If that doesn't make you dizzy, nothing will.

Sheryl Sostarich

What was not to like about the stock market of the 1990s? No matter what you bought you made money. We didn't want to believe it, but it wasn't going to last forever.

We are experiencing the pain of a near-total meltdown of the financial markets. In spite of the infusion of trillions of dollars of federal stimulus, there still may be more bad news.

When Fortune senior editor, Brian O'Keefe asked several prominent money managers, "Is the buy and hold strategy dead?" Jeremy Siegel screamed into the phone, "That's about the craziest thing I've ever heard!" Still fuming, he asked Brian, "What's the rationale for anyone saying that?"

Jeremy Siegel happens to have 200 years' worth of U.S. market returns and he's not about to change his mind in favor of an active trading strategy. He'll be the first to tell you "the fact that we had ten bad years doesn't mean that we're going to have another ten bad years."

John Bogle argued that, "it is one thing to get out of the market at the perfect time and yet another trick to get back in at the perfect time. The odds are heavily stacked against you to get it right twice."

Before you have a panic attack, it's time to focus on some simple planning rules:

1. Don't invest money you can't afford to lose.

2. Don't let excessive fees eat into your returns.

3. Do diversify with fixed income ETFs the closer you get to retirement.

4. Do consistently rebalance your portfolio.

5. Do add new money at regular intervals to get the benefit of dollar cost averaging. 

Sheryl Sostarich

If you're the type of investor somewhere between the buy and hold strategy and active trading, trend following might be just the strategy for you. Getting in tune is easy; getting there requires a strict discipline. That means ignoring your hunches and gut feelings and doing a visual analysis.

Tom Lydon's investment firm uses the 200-day moving average as the basis for all of its decisions. If the price of an asset drops below its 200-day trend line or falls 8% below recent highs, it's time to sell. It's safe to get back in when the price crosses above its 200-day trend line or rises 5% above the recent low.

The cash generated from selling an asset is free money to be used for any investment in which an up-trend is developing. If no sectors offer any opportunity, the safest place to hold money is in the money market or Treasury securities.

Active traders will find it downright boring to hold money in the money market. Those individuals have ETF hedging tools (such as options contracts) that allow them to lock-in profits when the trend is down.

By all means, keep your poker face at all times. When we become emotional, it is nearly impossible to make the right decisions.

Sheryl Sostarich