Profit From Volatility

Pity the poor long-term investor who plunked down a pile of moola on the exchange-traded fund (ETF) known as Cubes (Nasdaq: QQQQ  ) on the first day of market action in 2000. That particular (and particularly popular) ETF shadows the tech-heavy Nasdaq 100, and during the course of the year, it proceeded to shed more than 36% of its value. The benchmark tracker gave up 31% the following year and added insult to injury with a decline of nearly 40% in 2002.

All told, from January 2000 through August 2005, Cubes gave back more than 57% of their value which -- to make a long, sad story short -- means that for all his good, stay-the-course intentions, our pitiable investor has a way to go before he'll ever see his principal again, much less a profit on his investment, the poor guy.

But it didn't have to be that way.

No muss, no fuss
There's more than one way, after all, to stay the course, and for many folks, a program of regular dollar-cost averaging makes a lot of sense. With dollar-cost averaging, you essentially put your investment on autopilot, sending in a set amount each month rather than putting down all your chips at once.

Dollar-cost averaging is a great idea for at least two important reasons. First, it's a smart way to smooth your ride to retirement bliss, because it's a technique that allows you to take advantage of the market's inevitable dips.

Second, going automatic is a great way to remain disciplined as an investor. Simply put, dollar-cost averaging gets you and your emotions out of the way of your financial goals, because you don't have to make a monthly decision about whether or not to invest. Indeed, you've already made that decision, and now it's simply being executed for you on a no-muss, no-fuss basis.

Sweet, no?

Oh boy!
Sweet, yes, but I certainly don't recommend that folks dollar-cost average through such ETFs as Cubes or the similarly popular S&P tracker SPDRs (AMEX: SPY  ) , either.

Don't get me wrong; I'm a big fan of these puppies, which track benchmarks such as traditional index funds but trade throughout the day like stocks. Indeed, I write regularly about ETFs for Champion Funds, the Fool newsletter service designed to help you beat the market with funds.

Thing is, with ETFs, you'll have to pay a brokerage commission each time you buy and sell. And those costs can add up very quickly, taking big bites out of your returns in the process.

Instead, I think traditional mutual funds are just about the perfect vehicle for dollar-cost averagers. And while you can certainly go the index route with choice picks such as Vanguard's 500 Index (FUND: VFINX  ) or Total Stock Market (FUND: VTSMX  ) funds, I firmly believe that intelligently chosen, actively managed funds are the better bet for beating the market. Indeed, they're really the only game in town. With passive picks like the aforementioned, the most you reasonably expect is that your funds will lag their benchmarks each year by about the amount of their expenses.

Oh, boy.

Rigorous Geek
That's why I approach fund analysis with the same geekiness and rigor that a certified stock jock would bring to bear on a company before taking the equity plunge. In Champion Funds, I focus like a laser beam on such core -- pardon the pun -- fundamentals as cost, strategy, performance, and managerial tenure. Indexing is a part of the newsletter's game plan, too, with bogey trackers appearing in the Aggressive, Moderate, and Conservative model portfolios we rolled out earlier this year.

The vast majority of those models' pie charts, however, are given over to actively managed funds, and, yep, like the roster of individual Champs, they're beating their benchmarks, too.

Needless to say, I think Champion Funds has a lot to offer folks who already own funds -- and that would be more than 90 million of us -- or those who may be looking to reduce their stock portfolio's risk profile with the addition of a few choice funds.

Believe me, we've got more than a few. And a risk-free gander at all of them -- not to mention our back issues, model portfolios, and world-class discussion boards -- is just a mouse-click away. If you're interested in beating the market while keeping a lid on volatility, I encourage you to give our service a whirl and let us know what you think.

Champion Funds lead analyst Shannon Zimmermanowns shares of Vanguard Total Stock Market. The Fool has a strict disclosure policy.

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