Most wealth is built steadily over long periods of time. There are exceptions such as some of the dot com wealth that was built in the second half of the 1990′s. (At least for those that were smart enough to protect their assets from the downturn.) That was a unique period in time that allowed for the growing of companies and investments faster than has normally been possible. However, more common are those people that have compounded to wealth steadily and meticulously year after year after year.

Preservation of Capital

To put it simply, if we don’t have any chips left, we can’t play the game. I have been referred clients that lost 50% or more in the downturn of 2000, 2001 and 2002. If an investor loses 50% of his portfolio, then he must earn 100% just to get back to his baseline. This is very difficult to do. As most of you know, I believe strongly in “compounding to wealth”. When you lose 50%, it is close to impossible to get back on track with your original compounding model.

* Overall Diversification and the Use of Various Asset Classes

The basic asset classes that I use to diversify portfolios are Stocks (small, mid, and large cap), Real Estate (REITS), Commodities (Metals, Natural Resources), Bonds and Cash. Most experienced investors recognize the need for overall diversification, which can take place in many different ways. My rule for individual stocks is that no single stock should

represent more than 5% of a given portfolio. This rule prevents what I call “single stock risk”, so that an Enron, WorldCom, or PG&E debacle cannot significantly damage a portfolio. There is also the need for industry diversification. Even though energy stocks did well in 2005, we would not want our portfolios to consist of 80% energy stocks.

* Tactical Asset Allocation Strategy

The awareness and use of long-term trending and re-balancing of the asset allocation is another form of risk management. This does not mean going to 100% equities in one cycle followed by 100% fixed income in another cycle. Some cycles may call for minor changes to the basic asset allocation while others may call for major changes. The awareness of these cycles combined with the investor profile should dictate the appropriate changes.

If the thought of your broker making money off

the bid/ask spread makes you less than thrilled, you should be aware that there are alternatives for trading, such as Electronic Communications Networks (ECNs). Electronic Communications Networks (ECNs) represent orders in Nasdaq stocks; they internally match buy and sell orders or represent the highest bid prices and lowest ask prices on the open market. The benefits you get from trading with an ECN include after-hours trading, avoiding market makers (and their spreads), and anonymity (which is often important for large trades)

Online Trading

You might also want to try trading online. Although trading online does not eliminate the role of market makers and specialists, it can provide you with many other conveniences, such as the ability to trade from your desk at work or at home. You should be aware, however, that online trading is not instantaneous, so you still might find yourself wanting to use limit orders instead of market orders. If there is a computer glitch and you are not sure that the order went through, try to contact your broker or issue a cancellation before re-submitting the order. You don’t want to end up owning twice as much stock as you had originally planned on buying.

Both buyers and sellers actively set prices in the stock market. Not surprisingly, then, there are two prices associated with every stock: the bid price and the ask price. The bid price is the price at which buyers say they will purchase the security; the ask price is the price at which sellers say they will sell the security. The bid and the ask prices are rarely, if ever, the same: generally, the

bid is slightly below the ask. The difference between the two is what is known as the spread-this is the amount that is taken by your broker as profit. Specialists, who are in charge of the coordination of the buying and selling of a certain stock, pair bids and asks together to streamline the process and keep the spread small but positive .

Since the bid and ask prices of a stock are in constant fluctuation, you need to be careful about your sales and purchases. The price that you see quoted may or may not be the price at which you actually buy/sell the stock. For instance, you may look on the internet and see that your stock is selling for a certain price and decide that it’s time for you to sell. However, you might also get distracted by something immediately afterwards, so a little bit of time elapses before you can contact your broker to tell him/her to sell your stock. Then your broker has to relay the order down to his/her representatives on the trading floor assuming the stock trades on the NYSE or Amex . By the time your trade is

actually executed, the price of the stock might have slipped from what you thought it was, and you’re left with less cash than you had anticipated.

Sound scary? Fortunately, trading does not have to work that way. The good news for you is that you have many options regarding the method of execution for your trades. In the above example, you would have been using what is known as a market order. Market orders definitely have their uses, but you should be aware of all of the following types of trades:

* Market Orders: As mentioned above, you tell your broker to purchase or sell a specified quantity of stock at the prevailing market price. These are often the lowest-commission trades because they involve very little work on the broker’s part.

* Limit Order: You tell your broker to buy a security at or below a specified price, or to sell a security at or above a specified price. This ensures that you will never pay more for the stock than whatever price you set as your “limit.”

* Stop Order: You tell your broker to buy a security at the market price once it reaches a level higher than the current market

price. The opposite would be true if you were selling: you would tell your broker to sell your security once it reaches a level below the current market price.

* Fill or Kill: You tell your broker to execute the trade immediately; if the trade is not filled right away then your broker does not execute the order.

* Day Order: You tell your broker to execute the trade by the end of the day; otherwise, he or she does not fill the order.

all of the stocks listed on the Nasdaq exchange . The index dates back to 1971, which is when the Nasdaq exchange was first formalized. The index is used mainly to track technology stocks, and thus it is not a good indicator of the market as a whole. Unlike the Dow, the Nasdaq is market capitalization-weighted, so it takes into account the total market value of the companies it tracks and not just their prices. Since the index tracks all of the 5000+ stocks listed on the Nasdaq, it includes more than just a representative sample of the technology industry. Critics charge, however, that the index tracks too many small companies whose performance increases the index’s volatility.

The following personality traits will help you achieve financial success:

* Discipline: Develop a plan, and stick with it. As you continue to learn, you’ll become more confident that you’re on the right track. Alter your asset allocation based on changes in your personal situation, not because of some short term market fluctuation.

* Confidence. Let your intelligence, not your emotions, make your decisions for you. Understand that you will make mistakes and take losses; even the best investors do. Re-evaluate your strategy from time to time, but don’t second-guess it.

* Patience: Don’t let your emotions be ruled by today’s performance. In most cases, you shouldn’t even be watching the day-to-day performance, unless you like to. Also, don’t ever feel like it’s now or never; don’t be pressured into an investment you don’t yet understand or feel comfortable with.

The following personality traits will hurt your chances of financial success:

* Fear. If you are unwilling to take any risk, you will be stuck with investments that barely beat inflation.

* Greed. As an investment class, ‘get rich quick’ schemes have the worst returns. If your expectations are unrealistically high, you’ll go for the big scores, which usually don’t work.

It is generally a good idea to avoid making financial decisions based on emotional factors.

Always do your homework. The more you know, the better off you are. This requires that you keep learning, and pay attention to events that might affect you. Understand personal finance matters that could affect you (for example, proposed tax changes). Understand how each of your investments fits in with the rest of your portfolio and with your overall strategy. Understand the risks associated with each investment. Gather unbiased, objective information. Get a second opinion, a third opinion, etc. Be cautious when evaluating the advice of anyone with a vested interest.

If you’re going to invest in stocks, learn as much as you can about the companies you’re considering. Understand before you invest. Research, research, research. Read books. Consider joining an investment club or an organization like the American Association of Individual Investors. Experiment with various strategies before you put your own money on the line. Examine historical data or participate in a stock market simulation. Try a momentum portfolio, a technical analysis portfolio, a bottom fisher portfolio, a dividend portfolio,a price/earnings growth portfolio, an intuition portfolio, a mega trends portfolio, and any others you think of. In the process you’ll find out which ones work best for you. Learn from your own mistakes, and learn from the mistakes of others.

Ifyou don’t have time for all this work, consider mutual funds, especially index funds.

Even though investing may be more fun than personal finance,it makes more sense to get started on them in the reverse order. If you don’t know where the money goes each month, you shouldn’t be thinking about investing yet. Tracking your spending habits is the first step toward improving them. If you’re carrying debt at a high rate of interest (especially credit card debt), you should unburden yourself before you begin investing. If you don’t know how much you save each month and how much you’ll need to save to reach your goals, there’sno way to know what investments are right for you.

If you’ve transitioned from a debt situation to a paycheck-to-paycheck situation to a saving some

money every month situation, you’re ready to begin investing what you save. You should start by amassing enough to cover three to six months of expenses, and keep this money in a very safe investment like a money market account, so you’re prepared in the event of an emergency. Once you’ve saved up this emergency reserve, you can progress to higher risk (and higher return) investments: bonds for money that you expect to need in the next few years, and stocks or stock mutual funds for the rest. Use dollar cost averaging, by investing about the same amount each month. This is always a good idea,but even more so with the dramatic fluctuations in the market in the past 10 years. Dollar cost averaging will make it easier to stomach the inevitable dips

And remember, never invest in anything you don’t understand.

4. Develop A Long Term Plan

Now that you know your current situation, goals, and personality, you should have a pretty good idea of what your long term plan should be. It should detail where the money will go: cars, houses, college, retirement. It should also detail where the money will come from. Hopefully the numbers will be about the same.

Don’t try to time the market. Get in and stay in. We don’t know what direction the next 10% move will be, but we do know what direction the next 100% move will be.

Review your plan periodically, and whenever your needs or circumstances change. If you are not confident that your plan makes sense, talk to an investment advisor or someone you trust.

We say this not just to discourage procrastination, but because an early start can make all the difference. In

general, every six years you wait doubles the required monthly savings to reach the same level of retirement income. Another motivational statistic: If you contributed some amount each month for the next nine years, and then nothing afterwards, or if you contributed nothing for the first nine years, then contributed the same amount each month for the next 41 years, you would have about the same amount. Compounding is a beautiful thing.

2. Know Thyself

The right course of action depends on your current situation, your future goals, and your personality. If you don’t take a close look at these, and make them explicit, you might be headed in the wrong direction.

* Current Situation: How healthy are you, financially? What’s your net worth right now? What’s your monthly income? What are your expenses (and where could they be reduced)? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns? What are your expenses?

* Goals: What are your financial goals? How much will you need to achieve them? Are you on the right track?

* Risk Tolerance: How much risk are you willing and able to accept inpursuit of your objectives? The appropriate level of risk is determined by your personality, age, job security, health, net worth, amount of cash you have to cover emergencies, and the length of your investing horizon.

Other Investing Strategies

Constant Ratio System: Unlike the constant dollar system, the same percentage of funds is

divided between different assets. When the balance is upset, it is periodically restored by moving money from overperforming assets to underperforming ones. This system prevents one asset class from dominating the portfolio. This is one way to maintain a desirable asset allocation.

Variable Ratio System: This is a variation on the constant ratio system that relies on market timing to shift the proportions of the various asset classes contained in the portfolio. Buying low and selling high is built into this strategy, but, like the constant dollar system, prolonged movements in a given direction will harm returns.

Bottom-up Analysis: This is a name for an investing strategy that focuses on the fundamentals of individual securities as opposed to the state of the overall economy.