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 for holding an unbalanced portfolio. Nor is it an excuse to delve into individual stocks you know little to nothing about.
After all, who can know the details of $340 billion ExxonMobil's (NYSE:XOM) exploration of the Cyrenaica Basin (offshore Libya) as well as the prospects for $3.4 billion Invitrogen's (NASDAQ:IVGN) latest genomics research and everything in between?
Not from concentrate
But let's say you know energy. Does that make it rational to hold nothing other than energy stocks? No. Although you would have earned annualized returns of 8%, 47%, and 33% holding ExxonMobil, Valero (NYSE:VLO), and Sunoco (NYSE:SUN) since 2000, your returns on those same companies from 1990 to 2000 would have been 17%, 25%, and 12%.
Still good, but not as good. See, the market moves in fits and starts. Hot sectors come and go. Money ebbs and flows.
Is the energy run slowing? It certainly looks like it. 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 1 is not viable for smart investors seeking long-term market-beating returns. Option 2 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 3.
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 nearly 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 13% since February and holds the likes of Gilead Sciences (NASDAQ:GILD), Sepracor (NASDAQ:SEPR), and Cephalon (NASDAQ:CEPH).
I couldn't tell you off the top of my head what any of those three companies do. Am I concerned? No. The manager of this fund has been on the case since 2000 and has outpaced his peers by 5 percentage points during that time period. He's also an MD! 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. If you're not comfortable analyzing micro caps, Shannon has a fund for you. If you're unsure of international stocks, Shannon's happy to share his ideas with a free trial.
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 to learn more.
This article was originally published on Dec. 29, 2005. It has been updated.
Tim Hanson does not own shares of any company mentioned in this article. No Fool is too cool for disclosure.
