The best mutual fund investment strategy for most people reduces risk and gives the investor plenty of flexibility. Here’s how to set yourself up to invest money so you don’t need to worry when the investment environment turns ugly.

We’ll use Jack as our example. He’s afraid of losing money, but at the same time wants to earn higher returns than he can get from his bank. A moderate risk, at most, he will accept. Jack is also frugal, and hates to pay fees to invest money. He has a savings account at the bank he adds to regularly.

His best investment strategy, according to his brother Jim whom he trusts, involves opening a mutual fund account with a major no-load fund company. This is where you get the best mutual fund investment bang for your buck, according to Jim, because the cost of investing is low. Plus, with a mutual fund investment you get professional management as part of the package.

Once his account is set up Jack will invest money systematically into four different mutual funds: a money market fund, a short-term bond fund, an intermediate-term bond fund, and a large-cap U.S. stock fund. To lower the cost of investing even more, the stock fund and bond funds will be index funds.

Remember, Jack is risk conscious. So, here’s how they set things up. Jack opens his mutual fund account by putting a few thousand dollars into a money market fund, where he has high safety and earns interest in the form of dividends. Plus, this gives him added flexibility in managing his account.

They set it up so that every month a few hundred dollars will flow from his bank account to his money market fund, which will be used as his cash reservoir. Then, Jack instructs the mutual fund company to have money flowing each month (equal amounts) into his three other funds (his investment funds) from the money market fund.

This is his best mutual fund investment strategy and it gives Jack plenty of flexibility. If he wants to add extra money, he sends it into the money market fund without interrupting his investment strategy. If he wants to take some money out, he takes it from there as well. He has the flexibility to change the amount of money that flows from his bank account and/or that flows into his various funds.

In the beginning he should have equal amounts invested in each of his three investment funds fed by the money fund. Over time this will change as all three will perform differently. The short-term bond fund is the safest of the three, paying higher dividends than the money market fund but less than the intermediate bond fund. It should not fluctuate much in price.

At the other extreme, the stock fund is the riskiest and it has good growth potential. The value of this mutual fund investment will fluctuate considerably.

To keep risk at bay, once a year Jack will rebalance his portfolio as part of his investment strategy. He wants to keep his stock fund and two bond funds approximately equal in value. To do this he simply moves money around between these three funds.

His money market fund is simply his cash reservoir, and it gives him added flexibility. The other three funds provide higher interest income and growth (the stock fund).

This investment strategy is especially attractive in a tax-deferred or tax-free account like a traditional or Roth IRA, because income taxes are not an issue until money is withdrawn from the account.

Investment securities refer to the documents that show that, one has lent money to a company or even to the government. The money is refundable upon an agreed period of time. The documents are purchased most commonly through the stock market. There are many types of investment securities available in the stock market today. However, they call for proper scrutiny before one can buy them because, what may be favorable in one situation or for one person, may not necessarily apply to another.

The securities range from bonds, stocks, mutual funds, treasury bills and bonds, shares among others. The rates of returns vary greatly depending on the type of security and the risk involved in each. Before an investor can buy the securities, there are some factors that need consideration. One needs to identify what it is that they hope to achieve by buying the securities. Is the investment for the purpose of gaining more money for immediate use, or is it merely as a way for saving for the future.

Saving for the future could mean having a retirement plan, or saving to buy a home or saving for your children education. If the purpose for example is to accumulate money for immediate use, securities like government treasury bills may not be the best to go for. This is because they take a long time to mature and earn dividends. They may therefore be best suited for future plans like retirement or use during a long planned for holiday or vacation.

It is wise to be informed on the different types of investment securities available in the market today. They are mostly classified into two categories, namely; equity securities, which include common stocks and debt securities, which include bank notes, treasury bills and bonds. The institution from which one buys the securities is known as the issuer. One needs to be careful about the insurer he chooses to work with especially because of the commission charged.

The best investment strategy for most people is to KEEP IT SIMPLE. Don’t complicate things when investing money or you’ll likely feel uncomfortable and lose interest. Here we offer a simple solution for both choosing investment options and asset allocation.

The best investment options for most people who want simplicity: index funds. You don’t need to worry about fund performance since these are mutual funds that track a stock or bond index. Plus, the cost of investing money is low if you go with a major no-load fund company.

The other half of the investment strategy equation is called asset allocation. To keep it real simple, you will be investing in three different types of mutual funds: stock index funds, bond index funds and money market funds. How much (what percent of your total investment assets) should you invest in each?

Best investment strategy for most people: 50% to stock index funds and the rest split evenly between bond index funds and money market funds. Investing money with this asset allocation puts half of your money at risk in an attempt to make greater profits. The other half is safer and pays interest in the form of dividends.

Your bond fund will generally pay more interest, and you will benefit when interest rates are stable or falling. When interest rates rise expect losses in any bond investment. Money market funds, on the other hand, benefit when rates go up and rarely (if ever) fluctuate in value.

If you want higher safety put more money in your money market fund than in your bond fund. For greater income in this safer half of your portfolio, invest more in your bond fund. Otherwise just go with our original asset allocation above.

Now, you know how to set things up. But to have a complete investment strategy you need to manage things over time. We’ll keep this simple as well.

Don’t let your allocation numbers get out of line as time goes by. If you started investing money with 50% in stock index funds and the other half evenly split as suggested … keep it that way. At least once a year review your progress and your percentages. Move money around when necessary.

For example, you see that your stock fund accounts for only 45% of your total vs. your original allocation of 50%. Move money from your other two investment options to get back on track.

Why I call this the best investment strategy for most people: It’s easy to set up and implement; and you can make better returns than many investors without the risk of taking huge losses like many do in a year like 2008.

The truth of the matter is most of us will never truly be able to retire. Oh, we may leave our current job or vocation, but in this new global economy, true retirement the way your parents retired is just a fantasy for most of us. The average American will need to continue to work well into their reclining years.

As an investment advisor, I know first hand how hard it is to tell a client what they don’t want to hear. If it’s any consolation, this news didn’t start out as a lie. It has just become very hard to perpetuate in the current time period of which we live and work.

Here is why:

1. The historical rates of return your advisor used in your planning (example 8%-10%) are only true if your investment horizon is 50-100 years. However for most people, 20-30 years is a more normal period for active investment. Much of your returns over that period depend not on the length of your holding period, but the calendar period you were invested. For example for the period, January 1989-September 2009, the S&P has returned approximately 8.5%, including dividends, through both a wild bull and depressing bear markets. For the 20 years, 1962-1982, the S&P 500 returned approximately 4.5% annually after dividends, well below the inflation rate of the period. So, as with everything in life, timing is everything!

2. Social Security is a program that is doomed to fail. With the growing aged population here in the U.S., spiraling medical costs and a slower influx of new workers to fund Social Security, something will have to give with this program. According to the Heritage Foundation, the Social Security Trust fund ran a deficit of $4.3 Billion in September 2009 alone and that was on top of a $5.7 billion deficit in August. This is bad news for retirees and taxpayers. One of two things must happen here, benefits must be cut or taxes must be raised (or some combination of both). Under almost any scenarios, those approaching retirement will pay in more and receive less (possibly nothing). This will leave most retirees with a big hole to fill in their retirement planning.

3. Asset appreciation is fleeting. For most of us, the American Dream is to buy a house, live in it until we are content to move on and then sell it for a large profit. As retirement approaches, we may even downsize to a smaller place and pocket the extra funds to support our lifestyle. According to the economist Harry Dent’s Age Wave Theory (www.hsdent.com), U.S. and European populations are peaking, based on his findings that a human consumer’s spending habits peak by age 50. The implications of this are that, excluding the affects of immigration, retirees can expect there to be spikes in unemployment and decreases in housing demand and therefore prices. If you throw in the housing glut that remains from the financial crisis, it is unlikely we will see significant price appreciation for many years to come. This same Age Wave Theory will also likely affect the demand for equities and other financial products, but to a lesser extent.

4. Medical costs will continue to spiral or be rationed. Medical costs in 2009 rose by 7.4% (the seventh straight year of 7%+ increases) according to the Milliman Medical Index Report (www.Milliman.com). We have already seen the spiraling costs of medical care front and center in discussions about President Obama’s Health Care Reform Package. Of course, the President claims that care will not be rationed, but the evidence is clear that it will be when we look at the systems in Canada and Europe. If you are denied medical care, private pay will be your only route to such care, therefore putting a further strain on your retirement savings. Additionally, long-term care insurance will continue to escalate in cost.

5. Finally, people are living longer, requiring greater savings for retirement. In the 1950s life expectancy in developing countries was just 50 years for men and 53 for women. Today, the average life expectancy is now 77.7 years according to the Centers for Disease Control and Prevention (CDC). This added life expectancy puts a greater strain on savings, the social security entitlement system and increases the demand and cost for aged services.

So enough with the doom and gloom, is there a solution? The simple answer is the solutions are numerous and most involve sacrifice. Solutions like earning more on your investment assets, forgoing emergency room visits except in real emergencies, better diet, more exercise, higher taxes, substantially lower benefits, and so on, and so on.

Of course the real question is do we Americans have the fortitude to accept these solutions and make the necessary life changes? If we don’t we stand to endanger our way of life and the lifestyles of our children with unsustainable public deficits and out of control entitlement programs.

Earnings Per Share (EPS) refers to net income (profit after tax) divided by outstanding shares. Appearing on income statements, it shows us the earnings of the company after all expenses have been paid off and adjustments made for all depreciation of assets.

As a result of accounting gimmicks, the earnings of a company can be easily manipulated. Therefore, if an investor just focuses on EPS, he may misread the value of a stock and end up making bad investment decisions. However, it will be much harder to manipulate the cash flow statement even tough it can still be done.

High quality EPS refers to earnings that are a relatively true representation of what a company actually earns. Increasingly, cash EPS is being used to evaluate earnings. Also known as operating cash flow per share, it gives us the net effect of the inflow and outflow of money in a company’s day to day operation. A cash flow statement breaks down cash flow into operation, investing and financing. A good company will normally display a growing trend of higher cash EPS against EPS.

Cash EPS measures the net operating cash flow of a company on a per share basis. A higher cash EPS implies that the business is getting more inflows than outflows. Even tough getting more cash inflows doesn’t necessarily mean that the business is making a lot of profit, basically, if a company is consistently getting excess operating cash flow, the business is surely generating extra cash from its sales after deducting all required payments related to the sales. The excess cash can be used to buy new assets, repay shareholders in the form of dividends or reduce outstanding bank borrowings.

Investors need to be extra careful when a company’s EPS is positive but has negative cash EPS. A negative cash EPS means the company has more operating cash outflows than inflows. It also implies that the company may have high inventory that isn’t selling or receivables that aren’t being collected. This requires extra financing either from shareholders’ money or banker’s loans. If this situation persists for a long period, shareholders or bankers may stop financing and want to be repaid.

Conversely, if a company has negative EPS but has positive cash EPS, investors need not be too worried about the losses incurred. Certain financial experts also define cash EPS as ‘EPS plus all non cash items’ like amortization and depreciation. Even though a company’s income can be affected by depreciation, amortization and other non-cash exceptional items, it can still generate positive cash flow from operations. If the company has zero borrowings, the extra cash flow can be used to reward shareholders with higher dividend payments.

It will be good of can compare a company’s cash with its own historical trend or those of other companies. Due to the cyclical nature of certain industries, investors shouldn’t be too worried about a temporary negative cash EPS when the whole industry is on a downtrend.

Investors will have a better picture of a company’s performance when they analyze the difference between the trend of cash EPS and EPS. If a company’s EPS and cash EPS are growing higher and cash EPS is always higher than EPS in most periods, this shows high quality in EPS.

Cash EPS is a powerful tool to use in determining the quality of a company’s earnings. Companies with a growing stream of cash EPS are better investments than those with higher EPS growth but negative cash EPS. Investors may be rewarded with higher dividend payments from the excess cash. However, if cash EPS is always lower than EPS, investors need to investigate whether it’s only temporary or due to high trade receivables, which may later result in high bad debts.