Living the millionaire life: there are no magic formulas to gaining material wealth. In her new book, The Money Coach's Guide to Your First Million, Lynnette Khalfani offers 10 proven methods to building an investment portfolio on your terms.

I'M GOING TO LET YOU IN ON SOMETHING that millionaire stock investors like Charles Schwab know. The vast majority of them don't spend a whole lot of time researching complicated companies whose businesses they don't understand. They don't make money by using secret investing strategies to which only the rich are privy. And they certainly don't rely on complex formulas, detailed spreadsheets, and sophisticated algorithms to figure out what to buy or sell. Do you know what they do instead? They master the core principles of investing--the straightforward, irrefutable, can't-go-wrong-with-this kind of advice that has worked for eons.

Here are 10 lessons I've been fortunate enough to learn as a result of interviewing some of the top minds on Wall Street--as well as everyday individuals who have proven to be remarkably successful at increasing their fortunes with stocks and bonds.

LESSON 1: Long-Term Investing Trumps Speculating, Market Timing and Short-Term Trading

Why is it that so many investors jump from one stock to the next without regard for the negative ramifications of buying and selling investments too quickly? Trading too often causes a number of problems. It generates high commissions; which makes brokers richer but takes unnecessary money out of your pocket. When you sell investments held for less than a year, you have to pay higher short-term capital gains taxes, which are imposed at ordinary income tax rates as high as 35%.

Trading too frequently also causes your investments to underperform over time. Despite all these drawbacks, countless investors persist in trying to time the market, jumping in and out of the market as if investing were akin to watching a spate of TV shows on a Saturday night. Such rapid-fire change may give you entertainment satisfaction, but it can be disastrous for your investing portfolio.

LESSON 2: index Funds Generally Outpace Actively Managed Funds

When a fund manager bets incorrectly on one of those favored stocks or industries, the actively managed fund's performance suffers. By contrast, with an index fund, you're taking the human element of a fired manager who is making subjective judgments out of the equation, and you're buying equal amounts of all the stocks that represent a given index. In the end, statistics show that these index funds outperform actively managed funds by an average of two percentage points annually.

For instance, $10,000 invested in an index fund that earns 10% a year over the course of 50 years will result in a gigantic portfolio that hits $1,170,000 in size at the end of those five decades. But if you were in an actively managed fund that returned just 8% annually, your $10,000 investment would compound to just $470,000 over 50 years. That's a full $700,000 less because of the 2% difference in long-term returns. The bottom line: more often than not, you earn far more with index funds than with actively managed funds.

LESSON 3: No-Load Investments Are Preferable to Funds with Loads

With no-load funds you don't pay any sales charge or commission to buy or sell shares in a mutual fund. By comparison, you do pay commissions when you invest in funds with sales loads. There are many different types of loads, and you need to be aware of them all. You can tell what kind of commission you'll be charged by the type of shares you purchase in a mutual fund. Class A shares indicate front-end-loaded mutual funds, or ones for which you pay an up-front fee that's deducted from your investment.

So if you invest $1,000 in a mutual fund with a 3% sales load, this means that $30 of your money is taken out to pay a commission, and just $970 is actually being invested. Class B shares are those with so-called "back-end" loads, meaning you pay no up-front fee, but you do pay a "redemption fee" if you sell before a set time, usually six years. Most B shares convert to A shares after six to 10 years. Class C shares are known as "level-load" funds. These don't charge a front-or back-end sales charge. Instead, you pay a higher annual fee.

LESSON 4: Diversification Is Always Better Than Putting All Your Eggs in One Basket

If there's one principle of investing that will serve you well time and time again, it's that you should always--repeat always--seek to have a diversified pot of investments. Unfortunately, far too many people fail to heed this conventional wisdom even though it's worked forever for large and small investors alike. Contrary to popular opinion, being diversified isn't solely about buying mutual funds. While it's correct that the average investor will get far better diversification with mutual funds than with individual stocks, it's also true that you can really go awry in your investing strategy if you don't know how to go about achieving proper diversification. Millionaire investors diversify across a number of areas--and so should you.

LESSON 5: Asset Allocation Is the Primary Factor in Portfolio Performance

Studies show that 90% of portfolio performance is determined by asset allocation--or how you divide up your investments. This means that you should be less worried about specific products and more concerned with making sure you've got the right mix of stocks, bonds, cash, and other investments. Too often though, people worry about finding the right individuals stocks or bonds to buy. This is a dangerous proposition because individual stocks can experience tremendous bouts of volatility in relatively short periods of time--making it very tough to say which ones will be long-term winners and which will be losers.

LESSON 6: Investing Earlier is Exponentially More Advantageous than Starting Later

To really optimize your long-term wealth, you need to make wise choices about being a diligent and consistent investor as soon as possible. So many people think, "I can't afford to invest," because of various bills. My philosophy is that you can't afford not to invest.

To realize how powerful and effective it is to save early on, let's assume you want to retire at age 65 and you're now 30 years old. If you invest $10,000 a year in your 401(k) between the ages of 30 and 40, and you earn a 10% average annual return, upon retirement you'll have a handsome nest egg that tops $1.7 million.

But what if you wait until age 40 to start? Your 401(k) balance at age 65 will be considerably smaller, just under $700,000. Starting earlier not only provides you more money later in life, because of the magic of time and compounded interest working on your side, but you'll also have less stress about your investments because you won't have to purchase risky investments as you age in order to make up for lost time.

LESSON 7: Fees Do Matter

You should always pay attention to the fees you pay to own various investments. But, fees are of particular importance in a flat or down market because fees and commissions can substantially eat into your profits. According to the Securities and Exchange Commission, there are myriad fees you may encounter.

Shareholder fees are account fees, exchange fees, purchase fees, redemption fees, and sales loads. With the exception of sales loads, all these fees are charged even on no-load mutual funds. Under annual fund operating expenses are distribution or service fees, also known as 12b-1 marketing fees in the industry; management fees; and other costs, such as custodial, legal, or accounting expenses. As in all things, you generally get what you pay for. If someone is dearly helping you to make money, then that person is probably worth every penny being charged.

LESSON 8: Risk and Reward Go Hand in Hand

As an investor, once you realize where you fit in on the risk scale, it's important that you accept what that means. For the aggressive investor, it means that some years your higher-risk investments may not pan out and you may actually lose money. Of course the upside is that you may have certain years when your portfolio significantly outperforms the broader market. As an investor of moderate risk tolerance, that means you can't realistically expect consistent annual returns in the 12%-13% range. If you're a conservative investor at heart, don't tell your broker, "I don't want to lose money," but then ask him or her about every hot stock you hear about on CNBC.

One of the best places I know of to teach you about risk--and about investing in general--is the National Association of Online Investors (www.naoi.org). The NAOI offers a five-course tutorial program called "The Confident Investing Series." It teaches you all the basics you need to know, and then some.

LESSON 9: Minimizing Mistakes often Results in Maximum Profits

If there's one fact I've learned from interviewing thousands of experts on Wall Street, it's that there is no such thing as a "natural born" investor. Sure, some people may appear to have a "golden touch" and a keen sense of what to invest in for big profits. But even the pros make mistakes; sometimes huge errors.

Those of you who read my first book, Investing Success, know that investing legend Charles Schwab wrote the foreword to that book, saying: "As Lynnette Khalfani so wisely points out, all investors make mistakes from time to time. But the most successful investors are those who are able to learn from these blunders and make wiser decisions in the future." During an interview, Schwab also told me that he'd made enough mistakes "to fill three books." It was then that I realized that savvy investors like Schwab possessed the unique ability to admit when they'd made a mistake, to correct that mistake, and to move on.

LESSON 10: Process Is More Important than Product

In Investing Success, I argued that mastering the investment process is far more important than trying to figure out which specific products to buy. My theory was that people who adhered to an investing system--meaning a concrete investing plan, a set of goals, and specific criteria for buying, holding, and selling investments--would naturally become more disciplined investors and would therefore be far more successful in their pursuits.

Frankly, I believe you can achieve stellar results using just about any viable investing process--provided it's rooted in some of the tried-and-true wisdom that I've discussed in this chapter. What often makes a system work, though, is an investor's willingness and ability to stick to the system. It's only by following the rules and accepting the discipline that an investing process or system requires that you get to take emotion and whim out of the investing equation. As a result, your investing efforts are much more methodical, logical, practical, and profitable.

The Money Coach's Guide to Your First Million by Lynnette Khalfani. Reproduced with the permission of The McGraw-Hill Companies. Copyright [c] 2007

The Millionaire Success Formula

Whatever your goals and dreams, rest assured that you can achieve them if you have the right regimen and practice good discipline. In this book, I introduce seven universal wealth principles that will guide you as you seek millionaire status. Together these principles make up the Millionaire Success Formula:

1. Make a personal prosperity plan.

* Develop a millionaire's budget, written goals, and a Financial Policy Statement.

* Establish a regimen for spending, saving, and investing and follow it diligently.

2. Invest first, last, and always in your reputation.

* Build perfect credit.

* Understand how having a stellar name is often better than having cash in the bank.

3. Live like a lender, not a borrower.

* Achieve zero debt.

* Decide to collect interest, not pay it, for the rest of your life.

4. Leverage the power of property.

* Ramp up with real estate.

* Use hard assets and other people's money to build riches.

5. Increase your fortune with proven methods, not shortcuts.

* Buy stocks, bonds, and alternative investments when prudent.

* Avoid fads, scams, and Wall Street long shots.

6. Overcome setbacks and minimize risks to your financial health.

* Make insurance a top asset.

* Protect yourself against the Dreaded Ds: downsizing, divorce, disability, disease, death in the family, and disaster.

7. Never forget the next generation.

* Create wills, trusts, and personal and business succession plans.

* Establish a wealth legacy.