Renaissance men don't exist. It's impossible to know and do it all. Renaissance investors don't exist, either. There's no way to be an expert in value, growth, currencies, other countries, oil, and pharmaceuticals all at the same time.
But that's no excuse to hold an unbalanced portfolio. Nor is it an excuse to delve into individual stocks you know little to nothing about.
After all, who can know all the details of $230 billion BP's
Not from concentrate
But let's say you like energy. Does that make it rational to hold nothing but energy stocks? No. Although you would have earned annualized returns of 5.6%, 31.3%, and 23.7% holding BP, Tesoro
Still good, but not as good. See, the market moves in fits and starts. Hot sectors come and go. Money ebbs and flows.
Is energy's run slowing? Maybe. Something else will take off next. I've heard it's health care. That's not good for me because health care, pharmaceuticals, and medical devices are not within my circle of competence. Perhaps they're not in yours, either.
What's a Fool to do?
There are some options here:
- Stick with energy and hope for the best.
- Drop everything and start learning health care.
- Seek help from the experts.
Option one is not viable for smart investors seeking long-term market-beating returns. Option two is not viable for anyone who hopes to have a social life. Moreover, it can take years to develop the experience necessary to see what makes for great companies within certain sectors and at certain market caps.
That leaves option three.
Hire the experts
To align your portfolio with the experts, look into mutual funds. There are thousands of funds devoted to specific styles, industries, and market caps.
But be aware that not all mutual funds come from the same cloth. To separate the good from the bad, keep your eyes peeled for low fees, lots of managerial experience, and a track record that was earned by the fund's current leaders.
That's the recipe for success espoused every month by Fool fund guru Shannon Zimmerman in his Motley Fool Champion Funds newsletter. His recommendations are ahead of their benchmarks by more than 10 percentage points to date, and his aggressive, moderate, and conservative model portfolios are all ahead of their benchmarks as well.
The model portfolios are what I'm most interested in. Since I have a long investing timeline, I keep my eyes on the aggressive portfolio. I've put some dollars in the index funds Shannon recommends and supplemented some of his sector picks with individual stocks I'm confident in.
As for health care, Shannon recommends a Champ that's returned 27% since February 2005 and holds the likes of Genentech, UnitedHealth
That's a biotech giant, two health-care providers, and a pharmaceutical/consumer health-care products company. That's about all I can tell you off the top of my head. Am I concerned? No. The manager of this fund has been on the case since 2000 and he's outpaced his peers by five percentage points during that time period. He's also a doctor! In other words, investors are in good hands.
Foolish final thoughts
A perfect portfolio has exposure to all areas of the market and holds only the best companies in each of those sectors. The magic of mutual funds is that they allow you to perfect your portfolio while concentrating on the industries you know. And if you don't know any industries, that's just fine. An all-fund portfolio can help you beat the market with less volatility. Click here if you'd like to learn more about the funds that have made the Champion Funds cut.
This article was originally published on Dec. 29, 2005. It has been updated.