In stock market parlance, a "correction" is usually taken to mean a downward swing of 10% or more. As I type, the S&P is off roughly 7% from the high it touched in May, which means we still have a ways to go before hitting correction territory. Nonetheless, the market's recent swoon does seem to indicate that the folks at the Leuthold fund shop have been on to something of late.
Dialing down risk
As reported in this earlier commentary, Leuthold's merry band of data mavens thinks there's a possibility that "a significant economic slowdown, or possibly a recession, could become increasingly obvious by the second half of 2006."
Now normally, as I do my homework for the Fool's Champion Funds newsletter service, I don't put much stock in market prognostications. These guys, however, have a habit of getting it right -- and of going where the data lead them. Not coincidentally, they've become cautious of late, reducing the net equity exposure of the now-closed LeutholdCore Investment (LCORX) -- a fund with top stock holdings that recently included AMR
As the management team put it in a recent letter to investors, "We believe it is a time to be conservative ... not aggressive."
Conservative, of course, is in the eye of the shareholder. Reducing your equity exposure is one way of getting that job done, but so, too, is favoring less volatile investments. One option: mutual funds that favor the kinds of stocks trendy types -- you know, the ones who inflated the market bubble during the late 1990s only to watch it burst in early 2000 -- typically avoid.
That means tilting toward prospects with the best relative valuations -- stocks that have less room to fall when the market heads south and greater upside potential when Mr. Market turns cautious. Indeed, a manager at one of our newsletter recommendations made out like a proverbial bandit in the post-bubble era, racking up a gain of more than 75% between March 2000 and December 2002 while the S&P shed some 33% of its value over that stretch of time.
Impressive, yes? And what's more, unlike Leuthold Core Investment, this fund -- which currently has significant sums plunked down on such market stalwarts as Pfizer
The Foolish bottom line
Make no mistake: I think the key to being a successful long-term investor is designing a well-diversified asset-allocation game plan that suits your timeline and tolerance for risk and sticking to it over the course of many years. That said, it is possible to be intelligently opportunistic along the way -- and a top-notch fund that specializes in out-of-favor stocks is a great way to do just that.
With that in mind, if you'd like to sneak a peek at this contrarian pick -- not to mention all the others we've recommended since Champion Funds first opened for business -- you're in luck: A free guest pass is just a mouse click away. Your pass provides access to our back-issue archives, model portfolios, and complete list of recommended funds.
Our members-only discussion boards come gratis, too, so click here to snag your pass and peruse a service designed to help you beat the market with mutual funds -- no matter which way the economic wind blows.
This article was originally published as "Heading for Correction" on May 16, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication didn't own any of the securities mentioned above. Leuthold Core Investment is a Champion Funds recommendation. Pfizer, First Data, and Anheuser-Busch are Inside Value recommendations. You can check out the Fool's strict disclosure policy by clicking righthere.