Make Money in Choppy Markets

These days, plenty of investors are consumed with determining whether we're revving up for a serious bull run, in the fitful early stages of a protracted downturn, or perhaps in for a long-term holding pattern.

Interesting question, I suppose, but no matter what the answer turns out to be, there are smart ways of building a portfolio that will help you make money no matter which way the market moves.

Spread your bets
Job No. 1 for savvy investors is building a portfolio that provides carefully calibrated exposure to each of the market's cap ranges and its valuation spectrum, too.

For example, even growth-oriented investors who typically favor such go-go companies as Google (Nasdaq: GOOG  ) , Genentech (NYSE: DNA  ) , Starbucks (Nasdaq: SBUX  ) , and Research In Motion (Nasdaq: RIMM  ) -- stocks with five-year earnings-growth estimates in excess of 20% -- should probably hedge their equity bets by owning more defensive value stocks such as Citigroup (NYSE: C  ) , Devon Energy (NYSE: DVN  ) , and US Bancorp (NYSE: USB  ) .

True, the growth prospects of these latter firms may not be as bright, but each sports a reasonable price-to-earnings ratio, not to mention a solid track record of getting the job done for investors (and then some) over the past decade.

The upshot? At the end of the day, owning both "flavors" of stock -- i.e., growth and value -- means that when Mr. Market has one of his inevitable mood swings and lurches in one direction while ignoring the other, the part of your portfolio that's "in style" will be there to help prop up the part that, for whatever short-term reason, happens to be out of fashion.

Are you bonded?
To be sure, any measure of equity exposure -- even if you do spread your bets around -- can leave you vulnerable to loss. Past performance, as every investor who's ever read a prospectus surely knows, is no guarantee of future results. And sometimes Mr. Market simply takes his football and goes home. When that happens, the best you can probably hope for is to minimize your losses and succeed on a relative basis.

That said -- and as a fund manager once told me -- you can't eat relative returns. That's why as I go about the business of cherry-picking the cream of the fund industry's crop each month for subscribers to the Fool's Champion Funds newsletter service, I put intelligent asset allocation front and center.

To my way of thinking, all but the most aggressive of investors should have some exposure to the fixed-income market. That might come in the form of owning individual bonds, which can ensure a steady stream of income. You might also consider going with bond funds, which can be a great way of diversifying your fixed-income allocation.

You might stake out a position, for example, in a choice high-yield or "junk" bond fund, a badly misunderstood asset class that boasts more keepers than you'd imagine. Then, once that's in place, you could add a fund that specializes in more buttoned-down corporate or government debt -- an asset mix that can improve the odds that at least some portion of your overall portfolio will make money even when stocks hit the skids.

The Foolish bottom line
At Champion Funds, we aim to zero in on the very best stock and bond picks the money-management industry has to offer. And so far so good, too. Our overall list of recommendations has beaten the market by more than seven percentage points since the service first opened for business back in March 2004. And while the vast majority of our picks are equity funds, we've also tapped a trio of keepers that cover the bond market from high-quality debt to high-yield and international bonds.

If you'd like to take a look at the whole shebang, no problem: Just click here for a completely free 30-day guest pass. In addition to our overall list of recommendations, you'll also be able to check out our model portfolios, back-issue archives, and members-only discussion boards, too.

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication didn't own any of the securities mentioned above. Starbucks is a Stock Advisor recommendation, and US Bancorp is an Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.


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