How Pessimists Can Make Money Today

The battle investors currently wage in the financial markets looks a lot like a boxing match. In one corner, gloom-and-doom investors like Nouriel Roubini point to the coming downfall of the Western economic system. In the other corner, optimistic long-term investors see unparalleled opportunities to take advantage of once-in-a-lifetime bargains in the stock market.

If you land squarely in the middle -- as most investors probably do -- you might think you just have to pick a side and be done with it. But that couldn't be further from the truth. Just because you're pessimistic about the near-term market environment doesn't mean you can't invest successfully. It'll just require a slightly different approach.

Pessimists cash in
In fact, being overly optimistic is a big reason why so many investors lost significant chunks of their portfolios last year. When times were good, investors flocked to stocks and stock mutual funds, trying to take advantage of big market gains that seemed to keep on going and going like the Energizer Bunny. That optimism turned to horror in 2008.

Now, everyone's more cautious. 2007's top performers, First Solar (Nasdaq: FSLR  ) and Onyx Pharmaceuticals (Nasdaq: ONXX  ) , gained 795% and 425% respectively that year, but they dropped 48% and 39% in 2008. Taking their place, defensive industries such as food and beverage stocks and low-end retailers shone; General Mills (NYSE: GIS  ) and Wal-Mart (NYSE: WMT  ) posted significant gains last year, despite a 38% drop in the S&P 500.

Unfortunately, 2009 hasn't started out any better. Stocks suffered their worst January ever, and despite some glimmers of hope about new government initiatives to revive the struggling economy, many are concerned that actions like the latest stimulus plan may end up doing more harm than good in the long run.

Calling in professional pessimists
If you're pessimistic about the entire economy, where's the right place to invest? Foolish fund expert Amanda Kish addresses that question this month in her most recent update on her mutual fund newsletter service, Motley Fool Champion Funds.

Essentially, just as some stocks have shown a tendency to hold up well during past economic declines, so have certain funds and fund managers shown proficiency in creating above-average returns for their shareholders. That doesn't necessarily mean that they haven't lost money -- nearly all stock funds did last year -- but they did succeed in outperforming their benchmarks by a large margin.

In her update, Amanda picks out four funds she thinks will help investors protect their capital while offering long-term opportunities to profit. Each one focuses on very different areas of the stock market. But through a combination of holding prudent allocations of cash or other fixed-income securities, as well as shares of rock-solid companies like Markel (NYSE: MKL  ) , Coca-Cola (NYSE: KO  ) , and Medtronic (NYSE: MDT  ) , each has demonstrated its ability to survive through tough times and help investors reach their goals. You'll definitely want to take a closer look at these funds.

If you'd like to get the inside scoop on each of these funds, head on over to read Amanda's article at Motley Fool Champion Funds. Not a subscriber yet? That's OK -- sign up now for a complimentary 30-day trial, which will give you full access to the latest update, as well as current and past newsletter issues and full analysis of each recommended fund. It's easy, and there's no obligation.

Whatever you do, don't let pessimism about the economy and the markets stop you from searching for the best investments you can find. Even when times are tough, you can still find the stocks and funds that will help you achieve your goals -- and in fact, your future financial success depends on it.

More on picking the best fund portfolio:

Fool contributor Dan Caplinger has always gravitated toward the pessimistic side. He doesn't own shares of the companies mentioned in this article. Wal-Mart, Markel, and Coca-Cola are Motley Fool Inside Value selections. The Fool owns shares of Markel. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy accentuates the positive.


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