But before choosing what to invest, you will need to decide how to invest first because your investment objective will determine your actual investments. For a new investor, the problem of determining how to invest isn’t any easier to solve than picking investments. However, there are strategies that can help and one of them is investing based on your time horizon. The reason for using different strategies for different time horizons is that we know the stock market is volatile in nature and it could take years for the stock market to recover from a severe downturn, like the one we are experiencing now. Though at the end, stocks always outperform bonds, in the short term, the stock market could take a big bite on your portfolio and leave you with no time to recover if you need the money soon after. With all these considered, it’s safe to say that your investment time horizon determines your investment strategy.

So what’s your time horizon? Depending on your investment goal, which could be more than one, you may have different time frames to achieve each goal. For example, you may be saving for a new car, a new house, or your retirement. All these different goals come with different time frames and, therefore, require different methods. In general, for short-term goals, play it safe with well-liquidated, short-term investments such as cash, CDs, or short-term Treasuries; for long-term objectives, lay the foundation early on by investing entirely in stocks.

Now let’s see some examples of how to invest for different objectives with a few asset allocation plans:

• Save for a new car: Time horizon – 3 years or less; Asset allocation – 100% in short-term investments;
• Save for a house down payment: Time horizon – 4 to 6 years; Asset allocation – 20% in stocks, 30% in short-term, 50% in bonds;
• Save for college: Time horizon – 7 to 12 years; Asset allocation – 10% in short-term, 30% in bonds, 60% in stocks;
• Save for Retirement: Time horizon – 13 to 16 years; Asset allocation – 20% in bonds, 80% in stocks;
• Saving for Retirement: Time horizon – 17 years or longer; Asset allocation – 100%;

Remember, these are just some general guidelines for initial asset allocation plans for different investment objectives. As the time frame changes, asset allocation has to be adjusted accordingly.

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In the article, Six Lessons for Investors, Mr. Bogle, who has become a critic of the fund industry, reinforces the idea that he has long advocated: Owning the entire stock market! Following are the six lessons that every investor should learn:

1. Beware of market forecasts, even by experts: Though not every analyst on the Street is wrong when trying to forecast the market, you should “ignore the forecasts of inevitably bullish strategists.”
2. Never underrate the importance of asset allocation: Investors should have not only common stocks in their portfolio, but also an adequate allocation to bonds, which have done very well in 2008. But how much? How about “a bond percentage that equals your age.”
3. Mutual funds with superior performance records often falter: Oh, haven’t we seen that already in 2008? Legg Mason Value Trust -55%, Fidelity Magellan Fund -49%, Dodge and Cox Stock -43%, and CGM Focus -48%. That’s exactly why “chasing past performance is all too often a loser’s game.”
4. Owning the market remains the strategy of choice: If your goal is to get market returns, not attempt to beat them, then you should own low-cost index funds because “active management strategies as a group lose because they are expensive. Passive indexing strategies win because they are cheap.”
5. Look before you leap into alternative asset classes: Did investing in foreign markets let you down in 2008? By looking at the number, the answer is yes because the MCSI World Index plunged 42% in 2008 comparing to the S&P 500 Index’s 38%. “When the investment grass looks greener on the other side of the fence, look twice before you leap.”
6. Beware of financial innovation: Mr. Bogle doesn’t like exchange-traded funds (ETFs), which he once called “a dream come true for entrepreneurs, stock brokers, and fund manager.” The innovations will benefit financial companies more than investors.

Did you learn these lessons from your own experience of investing?

*Photo source: kenfallin.com

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