Why stop investing when prices are low? John Bogle asks

With media coverage of the September 11th anniversary reaching a crescendo this week, confusion and fear seems rampant among investors and even some financial advisors.

But anxiety about an unknowable future has always been the investor's lot. There never was a time when anyone could predict the future directions of the stock market, interest rates, currencies or the economy.

Even if you can't see exactly where you're going, that doesn't mean investors can't tilt the odds in their favour. Consider the following seven useful investing principles, which I came across at www.bylo.org. They were posted to the Internet by an anonymous contributor at Morningstar's Vanguard Diehards forum. That's where the do-it-yourself indexers known as "Bogleheads" [after Vanguard founder John Bogle] hang out to exchange investment ideas.

1. Define your goals.

2. Diversify across different asset classes according to time horizon, financial situation and risk tolerance.

3. Minimize costs and tax consequences.

4. Add new money regularly.

5. Periodically rebalance to bring your portfolio back to your target [asset] allocation. But do so in light of consideration number three.

6. As you approach the time you will need the money, start tilting your portfolio toward those asset classes with lower near-term volatility.

7. Stay the course.

Point seven is the bottom line for most financial advisors. The "course" to be cleaved to is essentially the first six points.

Bogle himself has been quoted in recent weeks on exactly this point. "For the index fund investor who has his asset allocation in stocks and bonds right, there's one thing and one thing only to do in this market, or any market, Bogle told the Boston Globe, "stay the course."

Lately, investors have thrown Bogle variations of the following question: Why should investors stick with indexing when the market is going down and may continue to go down for some time?

That's the wrong question, Bogle replies. '"The reason to stick with index funds and to keep money in the market is because no one knows what is going to happen ... I am pretty confident that American business will make more money in 2005 than it did in 2001, and I am very confident it will make a lot more money in 2010. Index funds will give you those returns when they happen."

So for those committed to the long-term -- five or more years -- Bogle suggests investors keep on dollar-cost averaging. "The last thing you want to do is stop the averaging program at the bottom when you kept investing while things were near the top.'"

Of course, if you are in retirement or so close to it that your time horizon is less than five years, then "staying the course" has less meaning. But even here, investors should fixate less on the daily ups and downs of the market. There's an excellent article at www.msn.com entitled What Really Matters in Retirement.

The writer, Liz Pulliam Weston, says watching your retirement accounts dwindle can make you feel panicky and out of control. But there are other important things which you can control and do something about today: maintaining health, family and friendships, and choosing where to live.

The article is based on a book published in the mid 1990s by Ralph Warner, called Get a Life: You Don't Need a Million to Retire Well. It warned the single-minded pursuit of money in one's working years can create so much stress and anxiety that it may undermine health, relationships and other interests.

Warner believes it's not necessary to rack up a US$1-million portfolio and concludes retirees can live well on less than 70% of their pre-retirement income.

A similar philosophy has been espoused by Canadian author Diane Nahirny in her 2001 book Stop Working, Start Living and Alan Dickson in his self-published Free Parking.

Thousands of Canadians have responded to Free Parking and said, "Yes, we value people more than things, family more than finances," Dickson wrote this paper recently.

As investors, all we can do is set the course we believe best enhances our odds, then stick to it. If, despite our best efforts, things turn out differently than we had hoped, we must maintain our equanimity.

Whether living or investing, the most useful attitude is suggested by the famous Serenity Prayer attributed to theologian Reinhold Neibuhr in 1934. "God grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference."