What the Big Money Is Buying

Millionaires are more likely to own funds than they are stocks.

That's according to the latest data from researcher TNS Financial. Its annual survey found that while 75% of millionaire households hold stocks and bonds, 80% owned mutual funds outside of retirement accounts during 2007. The big money has been buying funds, too -- last year, only 68% owned funds.

TNS says this finding demonstrates a commitment to "develop a long-term financial plan, and stick to it." I agree. Automatic fund investing is one of the smartest things you can do to supercharge your investment portfolio.

Bet on the guy who could go hungry
Still, if you're going to buy funds, you need to restrict yourself to buying from fund managers who depend on market-busting returns, rather than fees. You want to bet on investors who need returns to:

  • Eat. Many funds that extract sales charges, known as "loads," are bad. That said, some load funds are quite good. John Keeley Jr.'s Keeley Small Cap Value (KSCVX) charges a 4.5% load when you first buy. Even so, Morningstar reports that, over the past decade, Small Cap Value is up nearly three percentage points per year on its peers.
  • Retire. Yet Keeley is a rarity. Fund managers will usually invest in anything other than what they cook up for your portfolio. So when their recipes produce returns that both smell and taste like spinach-flavored ice cream, you're the only one stuck holding your nose and suffering through the meal. (If you can call it that. Eeeewww.)
  • Grow. It gets worse. Some funds will charge you so that they can market their wares to others. That's what's known as a 12b-1 marketing fee. More often, though, this is padding; a kicker that helps pay for the company Christmas party. Seriously, ask the good folks running MainStay Equity Index (MCSEX), a serial underperformer that's closed to new money -- yet still charges a 12b-1 for many of its share classes. Un-freaking-real.

Let's put these principles into practice. Top investor Steve Leuthold has beaten the market soundly for years via his (sniff) now-closed Leuthold Core Investment (LCORX) fund, a Motley Fool Champion Funds pick.

Leuthold Core Investment's top 10 stock holdings include:

Company

Last Closing Price

CAPS Rating (out of 5)

Wal-Mart

$59.80

***

Transocean (NYSE: RIG  )

$147.47

*****

Pride International

$43.99

*****

Noble (NYSE: NE  )

$63.83

*****

Joy Global

$88.18

*****

Bucyrus International (Nasdaq: BUCY  )

$73.79

*****

Diamond Offshore (NYSE: DO  )

$137.64

*****

Teva Pharmaceutical (Nasdaq: TEVA  )

$45.98

*****

Celgene (Nasdaq: CELG  )

$63.35

****

Ensco International (NYSE: ESV  )

$74.54

*****

Sources: Morningstar, Motley Fool CAPS.

To get this portfolio, investors had to pay zero sales charges or other fees, aside from an annual expense ratio. And according to the latest statement of information, Leuthold still has more than $100,000 invested in his firm's funds -- the highest category per disclosure rules.

No surprises there. It's easy to eat your own cooking when you're serving filet mignon.

Taste the difference. When investing in funds -- and chances are you will, if you aim to make millions -- stick with those that have no choice but to outperform. They're the ones most likely to make you rich enough for a spot on TNS's survey.

Leuthold Core Investment has doubled in value since joining the Champion Funds portfolio. So have five others. Discover their identities with a 30-day free trial of the service. There's no obligation to subscribe.

Fool contributor Tim Beyers also writes for Rule Breakers. He didn't own shares in any of the companies mentioned in this article at the time of publication. Wal-Mart is an Inside Value pick. The Motley Fool has a market-beating disclosure policy.


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