Learn From Your Losers and Win

No matter how well you invest, you won't avoid losses entirely. Luckily, you can afford to take fairly substantial hits from time to time and still reach your long-term financial goals.

Obviously, the past year has taken a lot of investors out of their comfort zones. After enjoying years of positive returns, the markets have finally given bullish investors a reality check. With the S&P down more than 40% so far in 2008, everyone has had to learn how to deal with falling stocks.

Learning from the pros
For some tips on what's working and what's not, it's interesting to look at how mutual fund managers have responded to the bear market. As you'll see in this month's brand-new issue of Motley Fool Champion Funds -- which is available online this afternoon at 4 p.m. ET -- the bear has changed the pecking order when it comes to winners and losers among fund managers.

Perhaps the best-known example of this is Bill Miller, whose Legg Mason Value Trust outperformed the S&P 500 for 15 consecutive years. Yet recently, he's had a terrible time, with the fund down over 55% this year in the face of large bets on Citigroup (NYSE: C  ) , Amazon.com (Nasdaq: AMZN  ) , and Sears Holdings (Nasdaq: SHLD  ) .

But Miller is far from the only one to have disappointing results this year. Plenty of good managers have seen formerly strong investing methods fail them in 2008. Bridgeway Aggressive Investors 1 (BRAGX), for instance, has suffered with other quantitative funds in this market environment, as techniques that require substantial leverage have had to deal with strong headwinds from the credit crunch.

Even winners lose
The thing that's hardest to remember in terrible years like this is that you don't have to dodge all of the market's bullets in order to put up good relative performance. In her year-end review of newsletter-recommended funds, Champion Funds lead analyst Amanda Kish singles out Royce Premier (RYPRX) as an outperforming small-cap fund, beating its peers by about 10 percentage points.

Yet that performance hasn't come without some major missteps. Picks such as Knight Capital Group (Nasdaq: NITE  ) and trucking company Arkansas Best (Nasdaq: ABFS  ) have posted nice gains so far this year. But the portfolio has its fair share of losers as well, including Fossil (Nasdaq: FOSL  ) and Reliance Steel (NYSE: RS  ) . Nevertheless, you'll find the fund near the top 10% of mid-cap funds for two years running.

That's a common theme among Amanda's picks. While most of them are down for the year, many have done better than their respective benchmarks -- and those that haven't are positioned well to reap the benefits when their particular investing styles come back into vogue.

You can't eat relative performance
Clearly, it's good to own mutual funds that have beaten the market averages. But still, there's only so much comfort you can get being down 30%, even if other similar funds have lost 40% or more. It's still a loss -- and you still feel the pain in your pocketbook from it.

But especially in judging fund managers, how your fund does in any given year is only one datapoint out of someone's full track record of investing. Just as chasing performance often burns investors who jump into the latest fad too late, giving up on a fund simply because it lost money won't do you much good.

Whether it's down-and-out sectors like REITs and emerging markets or ones that have held up well, such as Treasury bond funds, comparing long-term track records that include both bull and bear markets will give you a better sense of a fund's future prospects.

If you're curious about how Amanda's other fund picks are doing, take a few minutes and look through the new issue of Champion Funds right now. It's a subscription-based service, but with our 30-day free trial offer, you can see not just the picks themselves but also our thinking about why we've included them among our recommendations. Try it out today -- there's no obligation, and you have everything to gain with nothing to lose.

For more on mutual fund investing, read about:

Fool contributor Dan Caplinger has been evaluating his entire mutual fund portfolio this year. He doesn't own shares of the companies mentioned in this article. Royce Premier is a Motley Fool Champion Funds pick. Fossil is a Motley Fool Hidden Gems selection. Sears Holdings is a Motley Fool Inside Value pick. Amazon.com is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy gets you where you want to go.


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