Take a good look at yourself in the mirror. How long do you intend to carry on working before you retire? Ten, twenty, forty years? Are you at your earnings peak right now, or is your income likely to fall away? How's your health?

And how about your liabilities? Are you footloose and fancy-free, or do you have young children you need to support through school and then perhaps university?

At a more immediate level, are you likely to want to get at your cash in the next five years? If so, how much of it? If you need to replace your car tomorrow or move to a new area because of your job, how easily can you afford it?

Chapter 4 helps you answer these questions and decide on an investing strategy to match your lifestyle.

Are the investment patterns that were right for you five years ago still right for you now?

Do you need to increase the proportion of cash in your investment portfolio? Doing so is user-friendly, safe (subject to certain provisos, as Chapter 7 describes), and also surprisingly flexible.

Do you perhaps need to transfer some of your shares into bonds that provide you with a reliable fixed income for as long as you hold them? If you're intending to keep your bonds indefinitely, price volatility won't apply to you: a 6 per cent yield on the money you invested when you bought them is a 6 per cent yield for life (or at least, so long as the bonds run until their redemption date). Financial advisers often tell their fifty-something clients to look for a suitable moment to buy bonds, maybe five years before their planned retirement, and lock into the slower pace at a time when they can have the bonds cheaply. That sounds like good advice to me. Chapter 6 covers everything you need to know about bonds.

But for everyone else, shares and other equity-type investments are still the way to go in the long term. Fast-and-loose, high-risk shares tend to be more suitable for young people and for forty-somethings with cash to spare than for parents in their thirties or older people. For these people, a safer approach tends to fit their needs more closely. But hey, I'm making a big generalisation, and your priorities may be completely different. Who am I to tell you how to live your life? See Chapter 4 on matching your investment strategy to your responsibilities.

Never, never take big risks if you're managing money for someone else who doesn't know much about investing. If you've got a nest-egg that's going to see your kids through school, you're insane if you blow it on something that may deprive them of part of their future. The same goes for Aunt Edith's inheritance that you're intending to pass on to the children when they reach 18. For these sorts of situations you want mainly cash (Chapter 7 covers cash investing), with perhaps a handful of large and solid ('blue-chip') companies to provide income and a reasonable hope of capital growth.

But even if you're not in this situation, don't automatically assume that your own money's all your own. Sole breadwinners whose spouse is completely dependent on them for income bear a responsibility to the spouse as well, and the duty of care's just as important.

I once had an acquaintance who was forced to admit to his wife that he'd just gambled away the family home on the futures markets, and that they were going to have to sell up. She is, of course, now his ex-wife. The fact that he was a financial adviser by trade and ought to have known better didn't make things any easier for him. (In fact, I suppose his trouble was that he thought he did know better.) But he's broke now, and probably selling double glazing. Being reckless is so very easy, and coping with the consequences so very hard.

An investor who's paying maximum rate tax won't welcome the big income yields from some sorts of shares if 40 per cent of everything he earns is going to go to the taxman. Especially when he could be putting it into capital growth stocks instead, that wouldn't attract any taxes at all if he ran them through an Individual Savings Account (ISA).

This is one of the most important decisions of all. If your money's in a guaranteed income bond (or a guaranteed equity bond, as they're sometimes known – see Chapter 6) from a bank or a building society, you aren't usually able to unlock the door at all until the five- or six-year term is up. Even in the few exceptional cases that are allowed, you'd suffer such big financial penalties on your withdrawal that you'd be wondering why you ever bothered.

But not just guaranteed income bonds lock up your money. If your cash is invested in small company stocks, whose fortunes tend to rise and fall with the economic cycle, you may have to wait a long time before you get the right price for them, because these stocks can be pretty illiquid sometimes. If in doubt, stick with larger companies where you know that at least your shares will be tradeable if you need to sell at short notice.

Most people's answer is that they can manage without some of the money but not all of it. So the right way forward is to have the right amount in a no-notice account, the right amount at 30 days' notice (say), and the right amount tied up for longer.

How much cash do you want to have available at a month's notice? Probably the equivalent of six months' income, but that's a strictly personal choice.

Chapter 4 covers the issues that help you make this decision.

Okay, here's something a bit radical. Throughout this book, I've tried to dissuade you from being tempted to borrow money in order to invest it in the financial markets. And a good thing too. Borrowing money in order to try and make more money (or 'leveraging', to give it its proper name) is a mug's game, because if you make the wrong call and your investments go down you might end up losing more than your original stake. That's what went wrong with my friend who had to tell his wife that their home was no longer their own, because he'd gambled and lost with money he didn't really have.

But even a moment's consideration will remind you that we all borrow to invest, whether we realise it or not. If you have a £100,000 mortgage on your home and also £40,000 worth of investments in the stock market – or even just in a pension plan – then strictly speaking you're in more debt than you really need to be. You're effectively borrowing £40,000 in order to feed your speculation habit, when in theory you could pay it all off and have less debt. Shock, horror.

Logic, of course, is a fool. You can only get so far in life by reducing your debts to the minimum and refusing to invest (or even to start to save!) until they've all been paid off. Instead, if you want your financial security to grow, then you need to take at least some risks in the financial markets – even if it's just the risk of the British government defaulting on your granny bonds, which isn't very likely. Didn't the parable of the talents in the Bible tell us that the son who earned the most praise was the one who invested his money actively, rather than simply burying it in the ground? (Although I'll have to agree that in this case the son got the money as a gift, and not as a loan.)

But the principle still holds well enough. Investing is considered to be a good and desirable thing by society in general, not least because it helps to create wealth. (How many jobs would there be if nobody took the risk of investing?) So it follows that it's okay to have a balance between your total debts and your investments, providing that you're personally happy with the balance.

People handle this balance in different ways. At the most cautious extreme are the people who hold all their savings and their debts in something like the Virgin One account, where your savings effectively go into a pot that offsets the outstanding mortgage balance, so as to give you an overall debt balance that's less than your mortgage. Slightly further up the risk scale are the people who take out mortgages to buy second homes, in the hope of making a profit. (Yes, that's another way of leveraging up your investments.)

At the far extreme of the risk spectrum are the adventurous types who borrow quite openly in order to invest directly in shares and bonds – something that your bank manager won't knowingly let you do unless you've got a proven track record of successful investing – and the real flying trapeze artists who speculate on derivatives with money they don't necessarily have at all. (I talk more bout derivatives in Chapter 12.)

And somewhere in the middle are the rest of us, who have one mortgage and a couple of pension plans, plus a little bit invested in the stock market. We don't like to think of ourselves as gambling with borrowed money, but to some extent that's effectively what we're doing. Are you happy with that? If not, then you need to sit down and do some serious thinking about whether you're really destined to be an investor or a 100 per cent safety player instead.

Lots of people really don't enjoy investing at all. That's absolutely fine. Most of us have more important things to do with our time than spend it poring over company accounts, and only the exceptions really get the buzz that makes everything worthwhile.

Here's another way of putting the question. If you were charging yourself £30 an hour for the time you spent on your investments, would you still be making a profit? If not, perhaps you're better off employing a professional to do your investing for you. The most obvious way of doing this is to buy unit trusts and investment trusts (see Chapter 14 on trusts). Or, if you want just a bit more control over things, exchange traded funds or other investments that you can buy and sell at short notice.

I haven't got much doubt that almost anybody with an ounce of common sense can beat the market professionals with a little application. No, make that 'with a lot of application'. Either way, if you don't enjoy the thrill of the chase, then you're only going to make yourself miserable.

Imagine yourself in a cowboy movie. Are you the silent loner who rides into town with a radical scheme that's going to shake up the locals a little bit? Or are you the wise old doctor who tries to dissuade the new arrival from pushing his scheme, because he's stirring things up too much and the locals prefer the attractions of safety in numbers?

An odd question, perhaps, but maybe it deserves some thought. The trouble with sticking to the well-trodden path and just following the herd is that you always end up with a merely average result. When the market goes up, your fortunes go up by an average amount. And when they go down, you feel every bit of the pain. That's herd behaviour for you.

The maverick has other ideas. He's always looking for opportunities to break loose from the pack. He may identify a cyclical trend that's moving upward, and rather than trying to persuade everybody else that he's right, he puts his own money in. Or he may decide to try shorting a stock, by selling shares he doesn't actually own (see Chapter 9 on this tactic) because he feels it's going to go down soon and shorting is the only way to make a profit out of the situation. Either way, he's pitting himself against the consensus and generally living off his wits.

All well and good. Do remember, though, that the mavericks in the cowboy movies have a tendency to end up face down in the dust. Shorting is a very risky business, and even the best investors get wiped out sometimes. And cyclical trends can be a lot less logical than you may suppose. Just ask anyone who's tried to fathom out the commodity markets in the last few years.

But I've set out some rather extreme positions here and fortunately a middle course can mitigate the risk. By keeping your wits about you and by knowing your stuff, you can certainly gain an edge on everyone else. But does it suit your temperament? And have you got the time to do the research?

Would your approach to investing be different if you were gambling with a future nest egg or if the money were just a little windfall that you could playing with for fun, on the off-chance you may strike it lucky? If the answer's yes, consider investing safely in the first scenario and setting up a different account to allow yourself a flutter on something frivolous and speculative every now and then.

I keep a small part of my share portfolio in a completely separate trading account, which I never, ever top up with fresh money. Capital growth (i.e. a rising share price) is the only way my money's ever going to grow! And it's growing just fine, so I suppose I must be doing something right. But if it ever crashed, I'd be out of my mind to try to rescue it with fresh funds. Don't pour good money after bad. Grandmother said that, and it's as true as ever.

Chapter 4 covers different investing strategies to suit different types of people.

This is the crunch question, really, and it comes right down to how well you know yourself. What do you do when you make a mistake and lose money? Do you go into denial and give the dice another spin, in the hope that you can break your run of bad luck before it's had a chance to start? Or are you racked by the torment of having deliberately put yourself in a losing position because you're too stupid to listen to good advice from people who know what they're talking about?

I want to encourage you to take a calmer, kinder approach to yourself. Every investor makes mistakes. I certainly do. And so does Warren Buffett, the world's most successful investor. He bought 7 per cent of the Coca-Cola Company in 1988 when its stocks were worth around $5, watched them rise to nearly $40 ... and then held them while they went right down to $15 again! Buffett also missed out on the entire technology boom of the late 1990s, because he didn't trust companies he didn't understand. And yet he's still the world's greatest investor, and the world's richest investor.

The right approach when you make a mistake is to sit down and force yourself to learn something from your errors, instead of hoping you can leave your 'bad luck' behind. That sounds simple, but you may be surprised how many people are temperamentally unfit for the task. No pain, no gain. Are you ready?