First rule of investing: diversify, diversify, diversify

— -- Q: Should my kids, age 37 and 38, move their still modest investments into bonds? Right now all their money is invested in the Standard & Poor's 500.

A: Stocks are great for the long run. The problem is that many investors who call themselves long-term investors really aren't.

Sure, when stocks are going straight up it's easy to say you'll hang on during corrections. And even brief corrections don't shake your faith. But the current downturn is a reminder of the importance of being a truly long-term investor with a time horizon of at least five years, preferably longer.

How does this apply to your kids? First, while they're young it's really their only time to have the largest exposure to stocks. Investing in the broad Standard & Poor's 500 index is a good way to do that. With long careers in front of them, they have time on their side and will be able to enjoy a market recovery, even if that's a decade from now. Stocks will likely still be the best place to be in the long term to get returns higher than inflation.

But should they be entirely in stocks? Absolutely not.

For one thing, in the wake of the credit crunch, yields on debt of high-rated companies that matures in five years or so are around 7%. That's 7% guaranteed, unless the company defaults. These are attractive yields worth looking at.

But remember that a one-size-fits-all approach rarely works. Even before your kids buy stock, they should make sure they have a cash cushion for emergencies. This is especially true in today's uncertain job market. The cash cushion should be adequate to tide them over at least six months if they are married and their spouse works. If they're single or unmarried, a nine-month supply of cash or longer is better.

Next, consider any cash needs that may arise in five years or less. This money, whatever it's needed for, should be invested in short-term Treasuries. If there's money left over, money they won't need for at least five years, that's the money they should consider investing in stocks.