Last week, I wrote about the "why" and "what" of investing: To create wealth over the long term by using bond and equity exposure to get there. But that still leaves the big question: How do I invest? This is tougher, especially now when the markets are in turmoil.

It's these chaotic times when the basics are more important than ever. Here's a quick review, whether you're a veteran of many market cycles or a beginner:

— Plan: Start by articulating your financial goals and dreams by putting a time frame on each. You might say, for example, "I want to save for college for my 3-year-old daughter." What does that indicate in investment terms? Well, it means you have 15 years to amass a certain amount of money. And you can probably figure out how much college, public or private, is likely to cost 15 years from now. That's the basis for an investment strategy.

Retirement is another obvious goal that requires planning. There are various tools on the Web to help figure out what you're going to need when it's time to leave the work force.

— Understand your risk tolerance: Now you have to decide how much chance you can take. Many people are highly risk averse when they start investing. The thought of a market decline can be disconcerting. Fear can cause some people to adjust their portfolios — "I'm moving out of stocks until the dust settles" — that may seem prudent in the short term but risky in the long term. Similarly, terrific bull markets often cause investors to take more chance than needed.

As you gain more experience with the normal ups and downs of the markets, you'll understand the importance of staying the course and taking the long-term view. Remember, you're investing for a decade (if not two or three) from now, so what happens over the next quarter or even the next year probably won't have any meaningful consequences for you. Risk is opportunity; therefore, don't be afraid to take calculated chances with long-term money — that's the way you build wealth.

— Asset allocation: When you create a portfolio, you'll most likely be choosing a mix of the major "asset classes": equity, bonds and cash. Some investment professionals consider international equity as a separate asset class. This is your asset allocation, and it's probably the most important decision you'll make about your financial future.

I wrote about equities and bonds in Part I of this column. In broad terms, equities (stocks) are engines for potential capital growth and bonds generate income. Cash serves as a kind of cushion, giving you a resource to invest more if the right opportunity arises. But here's the really interesting point: The right mix of these asset classes can reduce overall portfolio volatility. Why? Typically, when stocks decline in value, bonds go up in value, and vice versa — though not always. Still, you can see how a mix of exposures should even out overall performance a little.

You can find asset allocation calculators online or by going to a trusted financial adviser. You might come away with something like: "Your portfolio should include 65 percent in equity exposure, 25 percent bonds and 10 percent cash." But recognize there's not one asset allocation that's right for everyone. The most common goals — needs, time frames and risk tolerances — will differ.

— Diversification: I touched on the critical importance in Part I. You may recall that diversification is the idea of spreading your risk. A portfolio of just one stock, to take an extreme example, would be too concentrated. If you own a dozen or several dozen, you greatly reduce the risk to your selection posed by any one security. A reasonable rule of thumb is that no single security or sector should represent more than 5 percent of your portfolio. Mutual funds can make it quite easy to achieve an appropriate level of variety.

KEEP TRACK OF YOUR PROGRESS

Now that you're in the market, you should stay up-to-date by measuring your progress and making adjustments as necessary. This isn't an everyday task, assuming you're a long-term investor. The day-to-day movements of the markets and funds probably have little impact on your long-term goals and strategies; however, it is a good idea to review your portfolio every three to six months. Maybe funds are up or they could be down. What must be done then?

You need to see how market changes affect your asset allocation in order to create adjustments.

Here's a simple instance: You built a $10,000 portfolio with the 65 percent/25 percent/10 percent allocation described above. After 12 months, your equity investment has zoomed in value. Your $6,500 in equities (perhaps an equity index fund) is now worth $8,500; the other two haven't changed much, but your asset allocation has been altered. Now your portfolio is worth $12,000. Your equity exposure amounts to nearly 71 percent, while your bond exposure is down to about 21 percent — your cash exposure is a bit more than 8 percent. Assuming for this example you want to stay in line with your target exposure, you need to sell some of the equity fund, buy more of the bond fund and add some money to the cash portion.

In real life it might not always be that simple (in a non-retirement account, for example, you'd have to consider the tax implications), but the principle is pretty clear: Your asset allocation is the embodiment of your enduring strategy. Stick to it, but be prepared to make adjusts due to circumstance changes.

Avoid panic selling, which is easy to do in periods of economic upheaval and market turmoil like we've experienced in recent weeks. Or don't let your emotions cloud your judgment. Remember, you're a long-term investor; you're going to access this money years, perhaps even decades, from now. What happens in September 2008, or even the whole of 2008, may not have a big impact on your long-term results as long as you stay the course. For many people, this is harder than it sounds.

CLOSING THOUGHTS

Finally, here's a sure-fire way to build wealth: Save more money. Even the best investment approach won't mean much, if you can't keep enough capital to reach your goals. Make a commitment today to save more money. That allows you take advantage of opportunities in the financial markets — and even though the markets seem particularly unattractive right now, economic conditions will surely improve, leading to returns in the financial markets.

I hope this quick overview of the investing fundamentals spurs you to learn more and enter the market. You can find many kinds of investment information online or by picking up a good book on the subject; I think you'll be surprised by how quickly you can get up to speed. And plenty of investment professionals with reputable firms can help you begin. But clearly, the key is to start.

Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co., Inc., Member SIPC. You can e-mail Carrie at askcarrie@schwab.com. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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