Three SIMPLE WAYS to achieve your goals.

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PUTTING IT TOGETHER

Successful fund investing doesn't stop with choosing the best funds. The next step is equally vital--combining the funds into a rational investment plan.

The most important part of the process is determining how much to place in stocks. Anyone who had money in stocks, particularly in those of large companies, during the 2000-02 bear market knows how easy it is to lose big money in a short time. But over the long term, stocks far outperform bonds and cash-type investments, such as money-market funds. Looking at every ten-year period since 1926, stocks have outpaced bonds and cash 80% of the time. The lesson: If you're investing for the long term, place most of your money in stocks or stock funds.

It's also important to diversify your portfolio. Different kinds of stocks-those of large companies versus small companies, rapidly growing companies versus undervalued companies, foreign versus U.S.-take turns leading (and lagging) the markets. The performance divergences are unpredictable and often enormous. Over the past five years, for example, funds that focus on small, undervalued companies gained 13% annualized, on average. At the same time, funds that specialize in large, fast-growing companies lost 1% annualized, on average.

Over the long term, different types of stock funds tend to produce roughly similar results, although small-company stocks perform better (and are also riskier). The reason for owning some of each category is to smooth your portfolio's ups and downs.

How should you divvy up your stock money? Roughly 50% belongs in large-company funds, split between funds that invest in growing companies and funds that invest in bargain-priced ones. Put 25% in foreign funds, and divide the final 25% among small-company funds that invest in growth companies and value stocks. But you may have to make adjustments, as we do below, for funds that buy different kinds of stocks.

This package is ideal for your toddler's college kitty-or for retirement a decade or more away. Invested entirely in stocks, it has a healthy weighting in foreign companies, including a small allocation to an emerging-markets fund. Two-thirds of the stocks are invested in large companies, both foreign and domestic. If this portfolio seems too aggressive, place 10% or 20% of your money in a bond fund, which will provide ballast.

When you're getting closer to retirement or when your children are nearing high school, add a bond fund. Do so gradually, selling off your stock funds and placing the proceeds in the bond fund. You'll still have the majority of your assets in stock funds, which should provide opportunities for growth, but the inclusion of the bond fund will dial down the portfolio's overall volatility.

This package is appropriate for those who are within five years of a goal or who are already retired. Investing in retirement is particularly tricky. You can't be too conservative, but you can't afford big losses, either. In figuring your allocation, think of your pension as equivalent to bonds.