As editor of Motley Fool Champion Funds, I spend a great deal of time seeking out the best the money management biz has to offer. But what exactly does it mean to be the best? Well, beingthe best means having experienced managers, time-tested strategies, and low expenses -- qualities that, in short, provide serious competitive advantages over the long haul.
It takes all kinds
When you're scouring the universe for just those rare picks that have what it takes to beat the market over the next three to five years -- no small feat, to be sure -- you take every advantage you can get. Just as important, though, is to identify funds that investors can assemble into well-diversified portfolios. To that end, I've highlighted funds from both the growth and value sides of the aisle. Small-, mid-, and large-cap funds have graced our pages as well. That's because when it comes to investing in mutual funds, smart asset allocation is a huge part of the game.
But why so? Why not just load up on a choice small-cap fund and let your nest egg ride? It's a fair question, if for no other reason than that small-cap stocks do seem to outperform the bigger boys over very long stretches. And over the past five years, the little fish have made swimming upstream look downright easy, surpassing their larger brethren by a significant margin as a group.
But sustained and impressive as the small-cap rally has been, Mr. Market is a fickle and cyclical beast. Indeed, given the degree of relative underperformance that large-cap stocks (and the funds that invest in them) have experienced for quite a while now, savvy investors might want to consider increasing their exposure to the market's behemoths.
Let's get big?
With the likes of battle-tested giants such as American Express (NYSE:AXP), Merck (NYSE:MRK), Home Depot (NYSE:HD), and Altria (NYSE:MO) trading at below-market price-to-earnings ratios (P/Es), their appeal is pretty darn easy to spot. And that goes double for such stalwarts as Ford (NYSE:F), GM (NYSE:GM), and Fannie Mae (NYSE:FNM) -- historically stable companies whose share prices have hit the skids.
For all that, I wouldn't advise stuffing all of your investment dollars into large-cap stocks, either. Yes, they tend to be less volatile than smaller companies, but there's just no need to put all of your (nest) eggs into any one particular market-cap basket. That way lies stomach-churning gyrations -- which can be great fun on thrill rides, of course, but not too enjoyable if you're using mutual funds to save toward retirement.
Fortunately, one of the great things about mutual funds is that it's relatively light work to assemble a portfolio that provides meaningful exposure to the market's various styles and cap ranges. Want to plunk down 50% of your investment dollars in buttoned-down large caps, another 20% in value-priced mid caps, and divide the rest between small caps and cash? No problem. The trick, of course, is finding the right funds. To that end, I've offered compelling options from each of those asset classes in Champion Funds. (Well, not cash. Who wants to write about boring old short-term savings vehicles? They are important, though, and you can get plenty of skinny on them by clicking here.) International and fixed-income funds are important diversifiers, too, and not coincidentally, I've covered those, as well.
One size fits one
But while analysts such as yours truly can point you in the direction of fine funds to add to your collection, only you can determine what constitutes the perfect portfolio. I've designed model portfolios for the standard investor groups -- aggressive, moderate, and conservative -- but most folks find that none of those suits is a perfect fit. For one thing, your tolerance for risk will likely vary according to your age and any near-term goals that arise. And moreover, even cautious types will likely want at least some exposure to growth stocks, even into the early years of retirement. Investing daredevils, meanwhile, should bear in mind the benefits of bonds as they get closer to AARP age.
At any rate, half the fun of fund investing (and despite what the stock jocks say, it is fun) is playing money manager with your own portfolio, tilting it toward growth or value and, even better, hiring and firing stock pickers as you see fit. Perfection isn't some distant point on the horizon, after all. It's a process. And the perfect portfolio is pretty much bound to always be a work in progress.
Keep up the good work!
If you'd like to see the more than 30 funds that Shannon thinks are Champs, click here for a free 30-day trial to Motley Fool Champion Funds. You'll also have access to his interviews with all-star managers, his model portfolios, and to the Fool's discussion boards, where thousands of fellow Fools are trying to build the perfect portfolio.
This article was originally published on May 11, 2004. It has been updated.
Shannon works hard for the money, so hard for it, honey. He doesn't own shares of any of the companies mentioned. Fannie Mae and Home Depot are Motley Fool Inside Value recommendations. Merck is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.
