Nearly every investment strategy touts its returns against an index such as the S&P 500 or Russell 2000. While that's great for accountability, that kind of measure doesn't do me much good.

I'm 59 years old, so I have less time to enjoy the fruits of the force Einstein found to be the greatest in the universe: The power of money compounding over time. Being so close to retirement also means I have less time to recover from any investing mistakes or major market dips.

Quite simply: avoid mistakes
Mistakes can really burn investors with short timelines. As one of my fellow Fools wrote in a recent post (link requires a subscription):

... Your goal shouldn't be to beat the market. If the market tanks, and you tank just a little less, then you have still lost money.

Instead, he says:

The real point of investing is to increase your chances of reaching your personal goals. . Sit down with your calculator. If you have sufficient capital to reach your personal goals with such rates of return (T-bills/annuities), then you are taking unnecessary risk by investing in the market, indexing or otherwise.

That's an excellent point -- and it's something all too many investors forget. There's just no reason to assume more risk than you need to.

It's hard to hit a target if you don't know where it is!
But I'm a stock jock. It's difficult for me not to invest in an opportunity when I see it. So another very smart Fool on our message boards suggested that I organize my investments into time-driven "pools" of money and to adjust the risk level of my investments accordingly. That made sense to me, so I followed his outline about how to proceed and discovered I only needed a 5% after-tax return on total investable assets to meet or exceed my conservatively estimated financial needs to age 90 (gee, I hope!).

My current investments, however, were aimed at a much higher return -- and a higher level of risk. Put these two posts together and a light bulb came on in my head.

Reducing the risk . a journey begins
Having determined the inflation-adjusted amount of money I'd need for each future time period, I began the process (still not complete) of matching the investment risk and needed return levels for each portfolio:



Risk Level




Next 5 years

Very Low

Money markets, CDs, T-Bills, short-term bond funds



6-10 years


Mid- to large-cap A+ dividend stocks, intermediate bond funds, selected sector stock funds, 3A insured non-AMT Muni bonds***, selected master limited partnerships (MLPs)



11-15 years


Selected deep value stocks, selected small-cap stocks, selected growth stocks, selected dividend stocks, selected real estate investment (REIT) funds, long-term bond funds



16+ years


Aggressive micro-cap stocks, aggressive small-cap stocks, aggressive growth stocks, selected individual REITs, precious metals and PM stocks




*Note that the size of each pool is not equal, but determined by the amount of money needed for that period of time, net of any income to meet all financial needs, including estimated inflation.
**Conservatively estimated, weighted average pre-tax return needed to make 5.09% after taxes; assumes an increase from current combined state/federal tax rates.
***At the point they are paying at least 5%, nontaxable state and federal.

Because I tend to agree with market masters such as John Mauldin and Warren Buffett that the total market indexes are likely to underperform their historical averages for the next decade or more, I've decided to stay with individual stocks, bonds, and focused funds. (That's not to say indexing is a bad strategy. If you have neither the time nor the interest, you can bet with the house. But me? I'm a stock jock through and through!)

Risk will also be reduced by maintaining a higher-than-normal cash position (15% to 20%), which I can use to buy irrationally devalued investments when either individual stocks or the general market stumbles.

Filling the pools
Let me reiterate: I love this stuff. For those who might not be as enthused as I am, you can fill the pools by researching an index fund. Vanguard Target Retirement 2015 (VTXVX), for instance, provides low-cost index exposure to several corners of the market. The fund is made up of Vanguard Total Stock Market Index (FUND:VTSMX), Vanguard Total Bond Market Index (FUND:VBMFX), Vanguard European Stock Index (FUND:VEURX), Vanguard Pacific Stock Index (VPACX), and Vanguard Inflation-Protected Securities (VIPSX).

I'm willing to put in the time and energy to fill my own pools, so I turn to individual stocks. And that's the difficult part -- which public companies are deserving of your much-needed dollars? I get several of my ideas from The Motley Fool's newsletter services, and today I'll share two of them with you. For the small- and micro-cap allotment, Hidden Gems has steered me toward superior investments. Hidden Gems often feature great growth prospects, strong balance sheets, and significant levels of insider ownership. Sleep Number bed maker Select Comfort (NASDAQ:SCSS), a Hidden Gems recommendation, is a stock I hold in my portfolio that fits this bill.

A reliable, undervalued dividend payer has been Income Investor recommendation Diageo (NYSE:DEO) -- a personal favorite and prime choice for pool 2. Diageo pays a 2.5% dividend, which is expected to grow as the company taps into the "more booze, less beer" trend of baby boomers. Its stable of premier brands includes Smirnoff, Jose Cuervo, Johnny Walker, Tanqueray, Captain Morgan, Bailey's, and Crown Royal.

The DEO management team, having previously shed their non-alcohol distractions -- Burger King (NYSE:BKC) to private investors who have since taken the company public and Pillsbury to General Mills (NYSE:GIS) -- is now focused on strategic acquisitions, shareholder-friendly stock buybacks, and core business growth. The company is doing a lot of things right, and the stock price has reflected this performance -- up more than 20% since Income Investor analyst Mathew Emmert recommended it in April 2004 (30+% for me, since I bought cheaper on an August 2004 pullback). Who says that good dividend stocks don't appreciate?

There are free passes available to both HiddenGems and Income Investor, as well as The Motley Fool discussion boards, but I'm not trying to sell you anything. Rather, I just want to highlight the importance of learning to build your own investment timeline and fill it with the right stocks. The Motley Fool is the way I learned to do this, but there are many others.

The Foolish bottom line
As you might imagine, this risk-reduction process is ongoing and will take some time to complete. This doesn't mean I've given up on all my investing fun. I will maintain to my dying day the "Murph's Mad Money" Fund, where I attempt to prove my brilliance to myself -- despite the fact that the attempt is doomed to failure. Yet even if this fund goes to zero, it will not affect my retirement one bit because it's outside the above grid. But the learning experiences it affords are priceless.

Fool contributor Ted Murphy is a veteran of 25-plus years of corporate warfare and nine years of entrepreneurial effort. What he doesn't know about investing he is patiently trying to learn. And he puts his investment money where his mouth is -- Ted owns shares of Select Comfort and Diageo. The Fool has a disclosure policy.