Man, oh man. No sooner do I take a couple of weeks off to welcome my new little one into the world than things start to heat up fast and furious around Fool HQ -- and on the apparently hot topic of index funds, no less.

Nathan Slaughter threw down the gauntlet a couple of weeks back, posting a provocative piece designed to scrape off some of the mossy conventional wisdom that's grown on the subject over the years. But Bill Mann, for his part, was having none of it. Bill saw Nathan's article as a full-frontal assault on a central tenet of Foolishness -- that, for the majority of us, index funds are the best place to stash our investing cash -- and promptly set out to correct what he called Nathan's "honest errors."

It really is a great debate, and if you haven't yet checked it out, you can begin playing catchup here.

The things we do for love
Against this backdrop, allow me to do one of the things I do best (i.e., make semi-obscure allusions to '70s-era rock music) and suggest that a compromise would surely help the situation. I know we Americans are fond of blunt instrument, either/or kinds of answers. These days we're said to be a polarized, deeply divided nation that pits red states against blue states, conservatives against liberals, Christina fans against those pesky Britney wannabes.

But it doesn't have to be this way, and where investing is concerned, it absolutely shouldn't be. With that in mind, here's a thought: When faced with the question of whether to invest in either (a) index funds or (b) actively managed picks, there's no need to settle for a zero-sum solution. You can -- are you ready for this? Huh? Are you ready? -- you can invest in both!

Ta-da! Thank you very much -- I'll be here all week.

But seriously, folks
Indeed, doing exactly that is a great way to add one more layer of intelligent asset allocation to your portfolio. That is, in the same way that it makes sense to divvy up your overall investment pie so that you have exposure to the market's various cap ranges and styles (i.e., growth and value), it also makes sense to divide your fund money between actively managed picks and index funds. Here's why. The main value of diversification is that it helps to insulate your portfolio from volatility. When growth stocks such as Intel (NASDAQ:INTC), Coca-Cola (NYSE:KO), and Cardinal Health (NYSE:CAH) hit the skids, for example, another slice of your portfolio -- perhaps the part that you've allocated to outperforming value stocks such as Hewlett-Packard (NYSE:HPQ), Boeing (NYSE:BA), ChevronTexaco (NYSE:CVX), and Honeywell International (NYSE:HON) -- can help cushion your returns.

By the same logic, savvy fund investors should hold both passively and actively managed funds. Index funds, after all, have held sway during certain market periods, while active picks have fared best at other times. Why guess whose turn it is if you don't have to? Moreover, because index funds generally trail the benchmarks they track by about the amount of their expenses, investing in them exclusively pretty well assures you of market-lagging returns.

That may very well be a worthwhile goal for the vast majority of investors, but it sure isn't for me. And maybe I'm going out on a limb here, but my hunch is that it's not for you, either.

You better shop around
That said, you can't just throw a dart to pick your funds. Not for nothing has the Fool beaten up on the "typical" mutual fund for many years. And there are certainly plenty of lousy index funds out there, too, bogey trackers that charge you a fortune just for the "privilege" of shadowing a benchmark.

Those, in fact, are among the main reasons why The Motley Fool uncorked Champion Funds earlier this year. My job as the newsletter's editor and analyst is to sift through the mountain of lousy, ethically challenged funds that vie for your hard-earned investment dollars and unearth those (and only those) that meet a stringent -- and, I assure you, 100% Foolish -- set of criteria.

I've laid out my checklist in earlier articles, so rather than restate it here, I thought I'd just show what it's all added up to so far. Crunching the latest numbers from mutual fund data kingpin Morningstar, here's how my recommendations stack up in the aggregate against their average competitor through the end of June 2004:

Avg. U.S. Stock Fund Champion Funds
Manager Tenure 4.8 10.5
Expense Ratio 1.30% 0.97%
12b-1 Fee 0.17% 0.00
Vs. S&P: 5 Years* 2.4% 10.6
Vs. S&P: 10 Years -1.4% 1.8
Vs. S&P: 15 Years -0.98% 0.93
Turnover 113% 31%
*Performance figures are annualized.

Impressive, yes? But wait, there's more: Champion Funds also comes complete with a monthly feature dedicated to the merits of -- get this -- index investing. Who'd a-thunk it?

More reading:

Shannon Zimmerman is a big fan of the poet William Blake, who once said that without contraries there is no progression. He doesn't own any stocks mentioned above, and you can test-drive Champion Funds (for free) by clickinghere.The Motley Fool is investors writingfor investors.