Category 3 Stocks

Midway through our tour of investing styles as hurricane storm categories, I guess it's only fitting that we sit in the middle of the equity seesaw by looking at a balanced portfolio. Peppering your holdings with a mix of value and growth stocks is a sensible approach. With styles falling in and out of favor, a little diversification can go a long way.

Motley Fool Stock Advisor offers newsletter subscribers the best of both worlds. David Gardner will single out aggressive growth stocks, while Tom Gardner applies stricter valuation benchmarks to companies to which the word "boring" may come as a compliment.

Before we dig any deeper, let's review what we have covered this week in this meteorological spin on investing.

• Category 1 took a peek at high-yielding investments
• Category 2 took a look at value stocks

Category 3 investing suggests stiffer winds, and that's where we're heading in the pursuit of greater rewards. Value stocks generally offer the luxury of limited downside while growth stocks have the potential for nearly limitless upside. That's where a balanced approach may make sense for you.

Get the balance right
My own portfolio shows this all too well. I am willing to take a chance on a highflier like Color Kinetics (NASDAQ:CLRK), a promising upstart that is growing like gangbusters as it revolutionizes lighting -- yes, lighting -- with LED technology. I do that knowing I have more shelf-steady investments like CBRLGroup (NASDAQ:CBRL) to keep things in balance. CBRL is the slow-growing parent company of the Cracker Barrel chain of cozy home cooking eateries.

Most brokerage statements -- perhaps even yours -- fall into this camp. It may not even be a deliberate deed. It's just how the buy orders fall. Motley Fool Stock Advisor arrives at that juncture by pitting brother against brother. David Gardner is on the lookout for the next great Internet company or promising video game maker. Tom has recommended seemingly sleepy outfits like health-care providers or auto parts manufacturers.

Right now, Tom is edging out his older brother. Tom's picks are up an average of 65% since the newsletter service started. David's selections are averaging a 39% return. That's still better than the 16% average produced by the jittery S&P 500 in that time.

You can diversify on your own. If you like edgy soft drink provider Jones Soda (NASDAQ:JSDA), in part because of its ability to grow its presence in conventional distribution outlets like Target (NYSE:TGT), why not buy into both Jones Soda and Target? That could be a vintage Category 3 play because the risky chance you are taking with Jones Soda and its sky-high upside is balanced by the somewhat steady predictability of the "cheap chic" discount department store chain that is helping Jones Soda branch out of its bottled stronghold with an exclusive canned soda distribution deal.

Winners from both sides of the fence
One of David's recent winners is Garmin (NASDAQ:GRMN). Shares of the popular maker of GPS devices that help drivers, pilots, hikers, and boating enthusiasts pinpoint their location are better than 50% higher since being singled out last fall.

Healthways (NASDAQ:HWAY) has been Tom's best-performing new selection over the past year. Never heard of it? Join the club. Tom won't be offended. He loves to unearth undiscovered companies as he digs into countless filings every month. For those scoring at home, Healthways provides care-enhancement services for hospitals and health plans. It has bucked the market's down-drifting ways and trounced fiscal third-quarter profit targets last month.

Convinced? Not yet? Still feel that straddling the fence and playing both sides is a zero-sum game? Get over it. As long as you're cherry-picking quality companies, it's diversification bent on appreciation.

Diversification bent on appreciation? I like the sound of that.

Are you a Category 3 investor or want to learn more to see if you are one? Give Stock Advisor a spin with a free 30-day pass to see whether Tom's and David's stock-picking styles are right for you.

Longtime Fool contributor Rick Munarriz aims to eat a balanced diet. He does own shares in Color Kinetics and CBRL Group. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.