Dated Stocks, Married Mutual Funds

My colleague Selena Maranjian hit the proverbial nail on the proverbial head with her recent mutual fund Valentine, and I'm in 100% agreement: I love 'em, too. I own a handful of individual stocks, but the bulk of my nest egg is invested in top-notch mutual funds for good reason. Here are three of them.

1. I hate losing money.
Investing luminary Warren Buffett's two rules are as follows: (1) Don't lose money; and (2) Don't forget rule No. 1. Not coincidentally, with its stock portfolio and collection of subsidiaries, his Berkshire Hathaway (NYSE: BRK-B) holding company is essentially a mutual fund in stock clothing.

Given that Buffett hates losing money too, that makes complete sense to me. Owing to their built-in diversification, funds are far less risky than individual stocks: With funds, your fortune (literally!) isn't tied to the fate of just a handful of companies.

Instead, you can build a portfolio the intelligent way -- by, say, investing in an "anchor" fund that targets large-cap market-beaters like Time Warner (NYSE: TWX), Best Buy (NYSE: BBY), and Yahoo! (Nasdaq: YHOO), each of which delivered annualized gains in excess of 20% for the 10 years that ended with January. Then, once that foundation is in place, you can plunk down smaller amounts on funds that favor speedier demons such as Akamai Technologies (Nasdaq: AKAM) and MedImmune (Nasdaq: MEDI), a dynamic duo that sports five-year earnings-growth estimates in excess of 25%.

Make no mistake: Funds aren't free of volatility. But if you're into what the pros like to call "principal preservation" -- and aren't we all? -- you'll be well served by world-class funds run by managers whose track records prove they can make the most of any market environment. That's a key criteria we use at the Fool's Champion Funds investing service, and since first opening for business nearly three years ago, all of our recommendations have made money for members. That's no accident.

2. I want to invest outside my core area of expertise.
I like to think I know a fair amount about both mutual funds and the domestic stock market. I'm less of an expert, though, when it comes to more esoteric asset classes like, for instance, emerging markets and high-yield bonds. Based on my timeline and tolerance for risk, though, I want exposure to both those groups in my portfolio.

Enter mutual funds, which provide a no-muss, no-fuss way for investors to put money to work in important areas they might otherwise avoid. After all, the criteria for choosing a high-quality fund is the same regardless of what area of the market it targets. Among other things, savvy types will want to focus on fees, managerial tenure, and past performance on the current manager's watch. Drilling down from there, as we do each month in Champion Funds, you'll also want to gauge the fund's strategy, tax efficiency, and whether the manager invests his own money alongside yours. As I've pointed out before, few mutual fund data points will ever tell you more than that one.

3. I want to beat the market while sleeping peacefully at night.
Last but not least, I love funds because they provide a great way to grow and protect your nest egg while beating the market. Index funds like Vanguard's dirt cheap 500 Index (FUND: VFINX) can play a role in a smartly designed portfolio -- they offer strategic diversification -- but I favor actively managed picks because I want to surpass the market's average. The most you can realistically expect with passively managed funds is to lag the benchmarks they track by about the amount of your annual expenses.

Not so with active funds. Indeed, in addition to making money with each of our Champion Funds recommendations, our picks as a group have sailed past the market's average by more than 12 percentage points, too.

If you'd like to sneak a peek at our winner's list and zero in on funds worth building your portfolio around, click here and a 30-day guest pass to our service is yours for the taking. Your pass provides access to our complete list of recommended funds, model portfolios, and members-only discussion boards. You'll also snag our latest service update, and when the next issue appears on Feb. 28, we'll begin a complete review (in capsule form) of every pick we've made so far. Convenient, no?

Take Champion Funds for a free test drive now and you'll also have access to our latest special reports: The Challenge: ETFs vs. Mutual Funds and Add Kick to Your 401(k)! Just click here to snag the reports and your free 30-day guest pass.

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Time Warner, Best Buy, and Yahoo! are Stock Advisor recommendations. Akamai is a Rule Breakers pick. Berkshire Hathaway is an Inside Value selection. You can check out the Fool's strict disclosure policy by clicking right here.