If you're reading this, there's a good chance you're an investor of the "stock-jock" persuasion. You love reading news about your individual holdings, and you approach investing with the kind of intellectual rigor that some of your best buddies reserve for fly-fishing or Beanie Baby collecting.
Me, too -- though in my case, I focus mainly on funds. Indeed, I'm the Fool's resident fund geek and can happily spend hours just analyzing the heck out of the suckers. (No, seriously.) Still, while scrutinizing individual contenders is a huge part of the fun of investing, I'd argue that it's really Job Two for savvy types. Job One is devising an asset-allocation game plan.
And that's as true for stock jocks as it is for fund geeks.
See the forest for the trees
As easy as it is to get caught up in a stock's "story," it's critically important to remember your own story -- and to ensure that your individual picks are consistent with your big, asset-allocation picture.
With that in mind, before you back up the truck and shovel in shares of small caps like MatriaHealthcare (NASDAQ:MATR), SonoSite (NASDAQ:SONO), or organic grocer Wild Oats Markets (NASDAQ:OATS) -- each of which is currently trading with a triple-digit price-to-earnings (P/E) ratio, according to data from Morningstar -- you should think long and hard about the direction in which those names will tilt your overall portfolio.
Make no mistake: The thrill of victory is plenty seductive. But one killer stock does not a nest egg make. Instead, if you want to beat the market over the course of your investing career (and you know you do, Fool), you need to take the long view and assemble a portfolio that's shock resistant.
Step by step
No investor is ever free from market volatility. You can, however, take steps to ensure that when one part of your portfolio hits the skids, another is there to help take up the slack.
You might, for instance, balance out the aforementioned race cars with a few value-priced big boys like Carnival (NYSE:CCL), Devon Energy (NYSE:DVN), Aetna (NYSE:AET), and HCA (NYSE:HCA) -- companies with P/Es below their respective industry averages and stock prices more than 20% below their 52-week highs.
You might also -- and this is where I get all fund-geeky on you -- consider plunking down the lion's share of your investment moola on a portfolio of world-class (and well-diversified) mutual funds and then supplementing with individual stock picks.
The Foolish bottom line
If that sounds like a smart asset-allocation plan to you, I encourage you to take Motley Fool Champion Funds -- the Fool newsletter service that I head up -- for a spin. We do all the heavy fund lifting for you, and during the two years and change that we've been up and running, our recommended funds have outclassed the market by more than 10 percentage points. And that showing has come amid far less volatility than you'd experience with a portfolio of just individual stocks.
If you'd like to take a gander at our list o' Champs -- along with all our back issues and world-class discussion boards -- just click here. The newsletter is yours to try free for 30 days, after which you can cancel, no questions asked.
This article was originally published on March 13, 2006. It has been updated.
Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service and doesn't own any of the companies mentioned. The Fool has a strictdisclosure policy.
