When I was a kid, I got $5 a week allowance, and for that I had a list of “chores” to do. Vacuum, dust, feed the pets, take out the trash, all that kind of stuff.

I would daydream of a robot that would do all that stuff automatically for me, so I wouldn’t have to do it.

Well l nowadays they’ve got robots that do some of that (“Roombas”) and gee, I guess that’s pretty cool.

But you know what’s waaaay cooler than that?

When your investments automatically work for you 24/7/365 regardless of whatever else you’re doing on any particular day.

I’ve got to tell you, that is the most liberating thing you can have going for you as an investor. It’s better than not having to vacuum the living room, that’s for sure.

But… there’s one thing that HAS to be right before it works: Your investing system — the algorithm you use to decide what to buy, what to sell and how to construct your portfolio.

If your system is consistently profitable year after year, you’re liberated. If it’s not, you’re sunk and probably will be tied to your job for a very long time.

Fortunately you don’t have to wonder which systems work and which ones don’t. It should be obvious. If you look around for about 10 minutes, it will be there staring you right in the face.

Unfortunately most people don’t look around. They don’t think. And they end up using a system, that doesn’t work, simply because it appeals to their emotions (usually greed and fear). So rather than using logic, they jump in based on emotions.

Here’s the thing… if you find someone trying to sell you an investing system (whether it’s a Forex robot or an options strategy or some secret black box software) purporting 500% returns a year, think about it. Ignore the greedy emotions flowing through your brain at that moment and just think.

First, look at the numbers. Let’s say you start with $10,000, which most people can come up with, and you’re able to achieve those succulent 500% returns.

Guess what?

In 5 years you’ll have over 77 million dollars. Do you know of anyone who has made $77 million in 5 years?

If you extrapolate over 10 years, you’d have more than $600 million. Does that sound achievable?

Even if someone is touting “just” 100% returns, you’re still looking at over $10 million in 10 years from a $10,000 investment. It won’t happen.

Second, look for others who have done it. If someone consistently returns 100% a year over 10 years, you’ll hear about him in the News.

If he’s using a system that does that, you’ll hear about the system. So if you haven’t heard about that person or his system, ask yourself, “why?”

The reason, as you’re no doubt aware, is because the system doesn’t do what it says it will do.

So don’t waste your time trying to follow it. You’ll just lose your money and be back at square one.

There is good news, however. There’s a system that can consistently return between 20 and 30% each year (on average), and it does so over very long periods of time (such as 40 or 50 years). It’s well documented and many people use it to turn $10,000 into $2 million over 25 years.

Plus you’ve certainly heard of the most famous user of this system. His name is Warren Buffett and he’s been pulling down 24 to 30% returns for more than 50 years using a value investing strategy.

At the end of the day, that’s about the best you can expect to make consistently over long periods of time. And it’s certainly not chump change, because Buffett rode this system all the way to a nice little nest egg of 50 BILLION DOLLARS.

Unfortunately it’s not always possible to invest in individual stocks. There are times when you don’t know enough about and industry or geographic region to invest safely. Recall that one of Buffett’s main rules is to invest in what you know.

Say you’ve heard that China is the next big thing (perhaps because you read a past issue of the Aptus eGazette) or you’d like to get some exposure to gold stocks or energy stocks (because, again, you read a previous eGazette), but you don’t know enough about China or gold stocks or energy stocks.

What can you do?

Well, rather than speculating and taking a big risk on a company you’ve never heard of, the smart money would buy some solid Exchange Traded Funds (or ETFs) that specialize in whatever you’re looking to invest in.

Wikipedia gives a good definition of an ETF:

“An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.”

Basically an ETF combines the best features of mutual funds with those of individual stocks. Of course you do pay more for an ETF than you would if you invested solely in individual stocks (because there is a management fee), but if you’d like to invest outside of your sphere of competence, that relatively small fee is very much worth the extra peace of mind you get.

ETFs are fairly new (having their genesis in the early 1990s), yet today there are literally hundreds of different ones managing over $600 billion in the U.S. alone.

They track everything from broad market indexes, such as the S&P 500, to individual sectors, like gold, technology and energy to specific countries — such as China — and regions, like Latin America.

Today I’ll share my favorite ETFs with you. Keep in mind I usually only consider using an ETF if I can’t purchase individual stocks in a particular sector or region for some reason.

I like to use them to gain exposure to foreign markets of which I have very little knowledge (China is a good example of this).

For example, the Shanghai stock exchange was up over 5% at one point on Wednesday, compared to a pretty flat domestic market.

Plus China’s GDP is estimated to grow almost 9% this year and nearly 10% next year! (and if you’re keeping score, the U.S. GDP has been negative and will be lucky if it squeaks into positive territory anytime soon).

Combine this with the fact that Chinese markets usually have low correlations with U.S. markets, and it makes quite a bit of sense to diversify some of your portfolio into China.

But, what Chinese stocks should you purchase?

If you’re like me, you don’t really know. And that’s where ETFs can help.

If you’d like to invest in some of the largest Chinese companies, the iShares FTSE/Xinhua China 25 Index Fund (ticker FXI on Amex — 0.74% fee) fits the bill.

You get instant diversification plus exposure to an economy that is growing by leaps and bounds (only India and Brazil are currently playing in the same league).

PowerShares Golden Dragon (PGJ — 0.6% fee) and Claymore/AlphaShares China Small Cap (HAO — 0.7% fee) are two others you might also want to look at.

At the end of the day, you still need to do your own due diligence, but investing in foreign ETFs, rather than individual stocks, takes away some of the risk.

The other ETF investment strategy I use is a little closer to home. I don’t follow the energy industry very closely, so if I choose to invest in energy, it will usually be through an ETF.

There are quite a few energy-related ETFs from which to choose, and they range from broad coverage of the energy sector down to specific sub-sectors (such as Oil or Natural Gas).

The most popular, by trading volume, is the Energy Select Sector SPDR (XLE — 0.22% fee) which holds many large, integrated oil companies such as Exxon Mobil (XON) and Chevron (CVX).

Of course if you’re only interested in clean energy companies, you can find an ETF for them too. There really are many choices and you definitely need to do your own homework when investing in ETFs (or anything for that matter).

But I did say I would tell you what I like to do, so here’s my 3-step plan for effectively using ETFs. First, I’ll select 2 or 3 sectors or regions that aren’t correlated (so when one sector or region moves one way, the others don’t usually move in the same way).

Second, I’ll purchase 2 or 3 good ETFs that track those respective sectors or regions.

And third, I’ll monitor and rebalance back to the original allocations when the current allocation strays too far from the original.

This allows me to automatically maximize my returns (rebalancing ensures I’m always buying low and selling high) and minimize my risk.

So there you have it.

You can drastically reduce the risk in your portfolio by utilizing ETFs when you don’t have the first-hand knowledge necessary to select superior individual stocks.

You gain exposure to the desired industry or region and you pay a relatively small fee in order to significantly reduce your risk. To me, that’s a win-win situation.