We Fool contributors are a lucky lot. We have the freedom to write pretty much whatever we want as long as it involves an investing topic that will add to our readers' collective knowledge. So, since nothing is taboo, I'm going to tell you something you might never read again at The Motley Fool: Our stock-picking services may be a complete waste of your time.

The problem with stocks
According to modern portfolio theory, rational investors will choose to diversify holdings in their portfolios to reduce risk while maximizing returns. Numbers back up the idea, but it's only half true. You can't really maximize your returns by diversifying, but you can reduce the risk that your portfolio's value will bounce around like a rubber ball from year to year -- otherwise known as volatility.

Yet some superior investors insist diversification is completely overrated. Take Charlie Munger, for example. Munger, who also happens to be Warren Buffett's business partner, has famously said that he and Buffett "... don't believe that widespread diversification will yield a good result. We believe almost all good investments will involve relatively low diversification." Indeed, Berkshire Hathaway's portfolio has provided ample support for this belief in recent years.

And therein, Fool, lies the fundamental problem with investing in individual stocks: Buy a lot of stocks and, as Munger says, you'll probably limit your upside. Buy only a few and you'll be subject to higher volatility. Well, that, and you'll dramatically increase your risk of substantial capital loss.

No matter how good the stock-pickers here at the Fool are, we'll never, ever be able to help you avoid those problems if stock investing is your game. You'll either simply have to deal with it or forsake stocks altogether. Sorry, pal.

Would that really be so bad?
That's why I have to ask: Why own stocks? Is it really worth the hassle? Not unless you're willing to spend some time on the endeavor, and you enjoy the idea of finding and buying what others won't, earning just rewards when you're right. That might sound good to many, and maybe even to you. But I'll bet most would rather eat a scoop of spinach-flavored ice cream than suffer through the wild gyrations of a high-risk portfolio.

Besides, you don't have to own individual stocks to generate superior returns.

How could that be? Managers, says Champion Funds lead analyst Shannon Zimmerman. His picks are being run by some of the world's best stock-pickers. And they've been at it for, on average, close to a decade. No wonder 75% of the funds he's recommended are ahead of their indices. Heck, with that much help, how could he lose?

Shannon's secret sauce comes from trimming the fat from the mutual fund market to find the best. That's not easy. For example, researcher Morningstar tracks 6,300 mutual funds. But certain key attributes lend clues. Among them: long-term manager tenure, managers who are invested in their own funds, a record of high performance, and a relatively cheap expense ratio. Have a look at the comparison between the average champ and the average domestic stock fund:

Domestic Stock Fund Average

Champion Funds Average

Manager Tenure

4.5 yrs

9.8 yrs

Expense Ratio



12b-1 Fee



+/- S&P (3 yrs.)



+/- S&P (5 yrs.)






*Data through September 2005

Invest with the next Peter Lynch
The irony of the stock market is that you can invest in formerly stable companies and still lose money. Just ask those who've had money in New York Times Co. (NYSE:NYT) over the past five years. Or Avaya (NYSE:AV). Or Dow Jones (NYSE:DJ). Or Eastman Kodak (NYSE:EK). Or, perhaps ugliest of all, Mercury Interactive (NASDAQ:MERQE). That's why diversification is still en vogue and will be for some time to come.

Great funds, on the other hand, don't have this problem. Diversification is built in, and the picks are combined into balanced portfolios assembled by world-class managers. Take Peter Lynch of the Fidelity Magellan Fund, for example. He bought and sold thousands of stocks during his tenure, and those who invested with him saw 29% annual returns.

Is the next Peter Lynch out there? Absolutely. You might want to join the search if your goal is the highest possible returns from your fund portfolio. Fortunately, it's easy to do. Just take a risk-free trial to Champion Funds today. You'll get access to every one of Shannon's picks, numerous interviews with top fund managers, and three specific model portfolios, all of which are beating their comparative benchmarks.

The Foolish bottom line
Individual stocks are always a great option for the business-focused investor. But what if your only goal is the highest possible returns? What if you don't give a lick about business? Then you're like the homeowner who has never learned a thing about maintenance. And just as you should forget trying to fix the plumbing yourself, you should probably forgo individual stocks in favor of funds. Your house, and your portfolio, will be better off for it.

This article was originally published on September 26, 2005. It has been updated.

Fool contributor Tim Beyers still considers himself a stock jock, but Shannon's performance leaves him wondering if he should be. Tim owns shares of Berkshire Hathaway. You can find out what else is in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.