Past performance is famously no guarantee of future results, but as a contrarian indicator, it can come in mighty handy. The market really does move in cycles, after all, taking your portfolio along for the ride. The upshot: Because one cycle's overachievers can be the next cycle's laggards, savvy investors should strive to zig when others zag.
That said, contrarian investing can be a contact sport, with market trends persisting far longer than we sometimes expect. Consider the late-'90s tech bubble, for instance. Now consider the Foolish wisdom of mutual funds. When chosen intelligently, funds can reduce your portfolio's volatility and allow you to take advantage of Wall Street's short-term thinking.
A nice investing twofer, no?
Don't follow the leader
With that as a backdrop, one smart way to proceed these days is to favor funds that traffic in discounted large caps such as Qualcomm (Nasdaq: QCOM ) , News Corp. (NYSE: NWS-A ) , and Time Warner (NYSE: TWX ) -- companies with stock prices at least 20% below their respective five-year highs as of Wednesday's market close. Home Depot (NYSE: HD ) and Fannie Mae (NYSE: FNM ) strike similarly discounted profiles, too.
To be sure, smaller fish such as AK Steel -- and, therefore, the kinds of funds that favor them -- have put up big numbers over the last five-year trailing period. It's worth asking, though, whether these stocks might be priced for perfection, given their healthy run-ups. At the very least, highfliers have much more at stake when earnings-growth forecasts are missed or when a hotly anticipated "catalyst" fails to materialize.
Meanwhile, after lagging smaller stocks for years, larger caps are showing signs of life; they currently represent the market's valuation sweet spot. Growth-oriented large caps seem especially attractive right now. Investors have bid them down (on a relative basis) for so long that the market has basically morphed into Crazy Eddie where they're concerned: Prices are so low, they're insane!
OK, maybe insane is overstating it. Still, the likes of Intel (Nasdaq: INTC ) and eBay currently trade at levels 25% or more below their five-year high-water marks.
Make no mistake: There's no timing a market's turn. That's another reason why smart contrarians should give funds their careful consideration: The built-in diversification they provide can smooth the speed bumps on the path to retirement bliss.
That said, with more than 7,000 of the suckers vying for your hard-earned moola -- and with the vast majority of 'em market-lagging time-wasters -- it pays to be choosy. You can always go the indexing route, of course, but remember: With index funds, the most you can realistically expect is that your funds will lag their benchmarks by about the amount of their price tags.
A Fool's final word
Enter Champion Funds, the Foolish investing service dedicated to beating the market with funds. Since opening for business back in March 2004, our complete list of recommendations has bested the market by a double-digit margin. These picks hail from all corners of the market, too -- large-cap growth included. Indeed, we've identified five choice large-cap growth funds that smart contrarians should consider for this year and beyond. You can sneak a peek at those funds, and all the others we've tapped, by clicking here to take Champion Funds for a risk-free spin.
This article was originally published as "The Best Investments for 2007" on Nov. 28, 2006. It has been updated.
Shannon Zimmerman does not own shares of any company mentioned in this article. Time Warner and eBay are Stock Advisor recommendations. Intel, Fannie Mae, and Home Depot are Inside Value picks. The Motley Fool has a disclosure policy.