Mutual Fund Market Beaters

First things first: I am a long-term investor through and through. I'm the kind of guy who buys to hold -- and hold and hold. Indeed, with an investment timeline of at least 20 years, a mere 22 months -- which is approximately how long the Fool's Champion Funds newsletter service has been up and running -- is just a drop in the proverbial bucket.

Still, since Champion Funds is my puppy, I can't help but be pleased by the fine start we've gotten off to out of the gates. To wit: All but two of the funds I've recommended have made money for shareholders, and taken collectively, our picks are beating the market by more than 10 percentage points.

What's more, we've notched that record with a varied assortment of funds. We have growth-oriented Champs that invest in the likes of Cisco Systems (Nasdaq: CSCO  ) , Motorola (NYSE: MOT  ) , and Sprint Nextel (NYSE: S  ) , for example, and we've also trawled for value-focused keepers that favor such names as Pfizer (NYSE: PFE  ) , SunTrust Banks (NYSE: STI  ) , Coca-Cola (NYSE: KO  ) , and Kraft Foods (NYSE: KFT  ) . We've zeroed in on a socially responsible stalwart and have uncovered some bond-fund standouts, too.

Not too shabby, eh?
Will this winning streak last? That's impossible to say, of course. As every investor who's ever read a prospectus surely knows, past performance is no guarantee of future results.

What I do know, though, is that by applying a consistent and rigorous set of criteria to the vast universe of mutual funds, it's possible to tilt the odds of beating the market in your favor by identifying those select funds -- we call 'em Champs -- that have what it takes to get the job done over the next three to five years and beyond.

With that in mind, I've outlined in previous commentaries three attributes -- a cheap price tag, a sensible stock-picking strategy, and gobs of managerial tenure -- that all prospective investors should place high on their mutual fund shopping lists. These, after all, are the key ingredients in any fund's recipe for success.

Intelligent asset allocation
But simply cherry-picking individual winners is only part of a fund investor's job, and I'd argue that it's not even the first part. Well before you fire off a check to a fund company, you should have an asset-allocation game plan in place. That is, given your timeline and investing temperament, you need to decide how much of your hard-earned moola you want to allocate to the market's various cap ranges (large, mid, and small) and investing styles (growth, value, and core).

Large-cap stocks, for example, tend to be less volatile than smaller fish and might therefore pack more appeal for conservative investors. Similarly, value funds can provide what investing luminary Ben Graham called a margin of safety, at least relative to their growth-focused counterparts. Because growth funds generally run with higher average valuation metrics -- i.e., such measurements as price-to-earnings, price-to-cash flow, and price-to-book value -- they have farther to fall when the market hits the skids.

At the same time, if you're willing to tolerate more bumps in the road in exchange for potentially greater rewards, those very funds may be just what you're looking for.

The perfect portfolio?
Ultimately, of course, the perfect portfolio is in the eye of the shareholder, but to help get you started on the road to intelligent asset allocation, we crafted our own Champion Funds model portfolios. These come in three flavors -- aggressive, moderate, and conservative -- and each offers high-quality exposure to a broad swath of the market.

Diversification, after all, is what savvy investors want and need, and that's one of the many reasons I think mutual funds -- which make diversifying a cinch -- are just about the perfect retirement savings vehicle for long-term types. A thoughtfully assembled portfolio of top-drawer picks can help keep the road to retirement relatively smooth.

That's a long and winding road, of course, but as we're seeing with the performance of our Champion Funds picks right now, getting to that destination can be half the fun.

Click here to redeem your risk-free 30-day test-drive of Champion Funds. There is no obligation to subscribe.

This article was originally published on July 12, 2005. It has been updated.

Shannon Zimmerman heads up the Fool's Champion Funds newsletter service and doesn't own any of the securities mentioned above. Pfizer and Coca-Cola are Motley Fool Inside Value recommendations. Kraft Foods is a Motley Fool Income Investor recommendation. The Fool is investors writing for investors, and has astrict disclosure policy.


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