Flirting With Disaster

The past three months have been awful for the stock market. Some investors, however, have suffered more than others -- hurting from losses that may have been worse than they had to be.

What makes a portfolio?
Carnage visits the unprepared. In investing, "unprepared" equals "undiversified." Consider modern portfolio theory, which says that an investor can reduce risk by holding a basket of stocks that represent various asset classes. That means an appropriate mix of large caps and small caps, tech and construction, stocks and bonds, and so on.

And there's method to this modern-portfolio madness. More than 200 stocks, each worth $1 billion or more, lost at least 30% of their market value over the past three months. Here are six notables:

Company

Total three-month
return through July 21

Broadcom (Nasdaq: BRCM  )

(41.4%)

Marvell Technology (Nasdaq: MRVL  )

(34.3%)

SanDisk (Nasdaq: SNDK  )

(23.6%)

Qualcomm (Nasdaq: QCOM  )

(29.2%)

Nortel Networks (NYSE: NT  )

(24.5%)

eBay (Nasdaq: EBAY  )

(28.8%)

Source: Capital IQ.

Don't flirt with disaster -- insulate yourself
Now, what if you had invested instead in one of Shannon Zimmerman's model mutual fund portfolios? You'd have fared better, though you'd still be down a few percentage points:

  • Aggressive model, down 7.3%
  • Moderate model, down 4.8%
  • Conservative model, down 1.8%

Put in real dollars, while a $10,000 investment in Broadcom would be worth $5,860 today, an investment across Shannon's aggressive portfolio would be worth $9,270. That's more than $3,000 saved to help fuel future returns.

Why the difference? Diversity.

Funds can typically hold and track more stocks than the individual investor can. Even better, those who follow Shannon's aggressive portfolio guidelines spread their investment across 12 Championship-caliber selections with different strategies.

That's a crucial point. As important as it is to diversify your holdings across industry (the big losers above are all in tech) and market cap, it's also important to have both growth and value in your portfolio. Fortunately, a few carefully chosen mutual funds are well-suited to provide both types of diversification.

Profit from the choices of Champions
Investing isn't a perfect science. And there are times when you should concentrate, like when you have studied a stock so closely that you've got every reason to believe the odds heavily favor you. That's the approach that made Warren Buffett a billionaire, after all.

Nevertheless, neither you nor I possess the same skill as Buffett. We're better off diversifying our investing assets and preserving capital, even in tough markets like this one. And that's where Shannon can help. His Motley Fool Champion Funds portfolio is up more than eight percentage points on the relevant benchmarks. Want to learn more? A 30-day trial will get you access to every one of his buy reports on our dime. Click here to get started now.

Fool contributor Tim Beyers is still a stock jock, but he's liking funds more and more every day. Tim didn't own shares in any of the companies or funds mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. eBay is a Stock Advisor pick. The Motley Fool has an ironclad disclosure policy.


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