Now you know the basics of investing, but how do you apply that knowledge to the process of managing your investments? You use the tools of asset allocation and diversification.

Asset allocation is simply the process of determining how you want to invest your money among the different investment options available to you. Do you want to invest some in bonds and some in equities? For your equity investments, do you want to invest only in U.S. securities, or divide that portion between U.S. and international stocks?

There is no one "right" way to allocate your assets. The best mix of investments for you will depend on your personal circumstances, discussed earlier — your time horizon, your financial responsibilities and resources, and your risk tolerance.

Whatever your personal investment mix, an important investment principle is diversification. Most of us were cautioned as children "not to put all our eggs in one basket," and that is all diversification means. You spread your risk by spreading out your investments, so that losses in one investment might be offset by gains in another.

• You can diversify by dividing your portfolio among different investment vehicles. Rather than holding all stocks, for example, you invest a portion of your portfolio in stocks and a portion in other vehicles such as bonds or cash equivalents. The prices or values of all these different types of investments will not fluctuate at the same time or in the same degree, so you protect yourself against total loss.
  
  
• You can diversify within a particular class or type of investment. You may want to diversify your equity investments, for example, by investing some in U.S. equities and some in international equities, or some in a passively managed fund and some in an actively managed fund.
  

By investing in pooled accounts, such as the those offered by MMBB, you automatically achieve diversification within each class of investment. This is because each fund is made up of a wide selection of securities within its class. The most diversified of all is the Balanced Fund, a single investment choice that uses multiple investment strategies.

Another investment management tool that you may hear about is market timing - the attempt systematically to purchase investments when their market value is down, and sell them when their market value is up. Sounds logical — after all, the basic principle of successful investing is "buy low, sell high."

But what sounds simple is very difficult to achieve. Individual investors who attempt to time the market typically are unable to time their moves accurately. As a result, they either lose out on potential gains by selling too early, or pay too high a price for a security by buying too late.

For a long-term investment, such as a retirement fund, it makes much more sense to buy and hold, letting dollar cost averaging smooth out the peaks and valleys of the market for you. Remember dollar cost averaging? That means investing on a regular basis at different prices over time. Your investments buy more shares when the market is down, and fewer when the market is up. Over time, your average cost is lower than the average price you paid for your shares.

Do not overreact to changes in the market. Although PICs allow you great flexibility and control, most financial experts caution against changing your investments for the wrong reason and at the wrong time. Remember that past performance is no guarantee of future results — last month's hot investment may cool off this month. Often the smartest thing to do is to choose a strategy and then stick to it.

The mix of investments you choose should take into account all the variables discussed earlier: your time horizon, your financial responsibilities and goals, your retirement resources and your risk tolerance. It is up to you to decide the right situation for your goals.

On the following pages are some common "investment personalities" and hypothetical investment mixes that illustrate what some investors might do.

If you have a long time horizon – 20 or more years until retirement – you might want to invest heavily in equities, both domestic and international. Any short-term dips in your account value may be made up over time. Plus, you are likely to outpace inflation and get a much better return on your money than if you put it all in bonds and/or cash.

You may be most comfortable with a balanced mix of investments in your portfolio. Or, you may be at a point in your life where your financial commitments (to your home, to your family, to your children's education) have increased. If either of these fit you, set a plan to make sure none of your goals gets shortchanged. Keep in mind that you still might have time to go before using the money you are investing, so growth should still be a consideration for a portion of your portfolio.

As you near retirement, you should be increasing your savings as much as possible. At the same time, you should consider gradually reducing the amount of fluctuation in your investments, since you may not have time to recover from a major market downturn.

And again, whatever your stage in life, a conservative approach may suit your personal risk tolerance better than more aggressive investment programs.

These sample portfolios are only examples and are not intended to offer investment advice. Your situation may or may not need similar investment strategies.