The market's recent volatility has given us all some thrills and spills lately, but let's face facts: Though there have been occasional pullbacks, we've essentially been on an upward trajectory ever since the fourth quarter of 2002.
Which raises this question: Despite the recent sell-off, is there further room to fall?
Could be, yes
By historical standards, we've enjoyed a lengthy bull run, and spendthrift stock shoppers will find no shortage of pricey equities. Red Hat (NYSE: RHT ) , for example, sports a price-to-earnings ratio (P/E) that hovers near 70, while Biogen Idec (Nasdaq: BIIB ) and Wendy's International (NYSE: WEN ) clock in above 30. Meanwhile, even such comparatively buttoned-down big boys as Kimberly-Clark (NYSE: KMB ) , First Data (NYSE: FDC ) , and Exelon (NYSE: EXC ) currently trade with P/Es higher than their five-year averages. Manulife Financial (NYSE: MFC ) does as well.
If the market hits the skids again, puffed-up multiples could deflate in a hurry.
How to proceed?
The good news is, you have compelling options when it comes to insulating your portfolio: top-shelf mutual funds. If you want to maintain exposure to the market while taking on less risk than you'd have with a stocks-only lineup, funds are an intelligent choice -- provided you choose them intelligently.
Intelligent funds are those with managers who have been in place for at least five years, and preferably longer. Tenure is a key metric for shrewd fund shoppers who know there's nothing inherently magical about a mutual fund -- it can only be as strong as the stock-picker calling the shots now. That's why past performance, on its own, is woefully overrated: If a fund's eye-popping historical returns don't belong to its current leader, they're next to useless when it comes to gauging the fund's forward-looking prospects.
It's better by far to focus on such things as fees, strategy, and whether managers puts their money where their mouths are by investing their own moola alongside that of their shareholders.
The Foolish bottom line
We consider all the above and more at the Fool's Champion Funds investing service, doing the legwork for our members by zeroing in on just those funds worth considering for their portfolios. And so far so good, too: Since opening for business more than three years ago, our recommendations have bested the market by a double-digit margin.
If you're looking to reduce risk and would like to save time by zeroing in on the cream of the fund industry's crop, consider taking Champion Funds for a free spin by clicking here. In addition to our complete list of recommendations, you'll also have access to our model portfolios, members-only boards, and every column inch of advice we're served up since day one.
This article was originally published on April 17, 2007. It has been updated.
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. Biogen is a Motley Fool Stock Advisor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.
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