First things first: I'm a dyed-in-the-wool Fool and, not coincidentally, a buy-to-hold investor who absolutely believes that the best place for long-term money is the stock market. No other investment vehicle -- not real estate, not bonds, and certainly not precious metals -- offers nearly as much bang for your investment buck over the long haul.
What's more, while the market's up-and-down cycles are pretty much inevitable -- not to mention fun to watch for market geeks -- they ultimately don't amount to a hill of beans.
On the other hand, if you're proactive and smart about it, you can make those cycles amount to something for your portfolio. After all, while the miracle of dividend reinvestment and compounding can help grow your stock nest egg at an impressive clip, the effect will be all the more miraculous if you play defense effectively and do a good job of preserving your principal when the market heads south.
Speaking of which ...
I don't make market calls, but as point person on the Motley Fool Champion Funds newsletter service, I do spend an inordinate amount of time poring over the thoughts and insights of some of the money management industry's best and brightest minds. And so I was struck by a recent quarterly report from the now-closed Leuthold Core Investment (LCORX), a "hybrid" fund (i.e., it holds both stocks and bonds) that has certain characteristics of a hedge fund -- including the fact that the team will take short positions when it thinks securities are overvalued.
The squad has crunched the historical data and, according to the report, is "concerned about the stock market in 2006, primarily because the current bull market run which began in October 2002 is getting extended." What's more, while Team Leuthold allows that "further upside is possible," it also uses ...
The "R" word
To wit: "The Leuthold Group research indicates it is possible that a significant economic slowdown, or possibly a recession, could become increasingly obvious by the second half of 2006. It is important to realize that the stock market is a leading indicator of economic strength, and historically, stocks typically turned down six to nine months before the economy turned down."
Cautious words, no? And given that they come from data mavens who have collectively racked up outstanding performance with their macroeconomic work, these are words that savvy investors ought to take to heart. Core Investment, after all, is a fund that delivered a total return of more than 218% between December 1995 and July 2006 -- a mark that beats the S&P 500 over the period by roughly 68 percentage points.
These guys, in other words, know whereof they speak.
How to proceed?
The first step is to think of your portfolio as just that -- not as a collection of individual picks you hope will each become 10-baggers, but rather as a mini-mutual fund in itself. Then, you need to take the measure of that portfolio.
Are you top-heavy with growth stocks like Schering-Plough (NYSE:SGP), Exelon (NYSE:EXC), and Network Appliance (NASDAQ:NTAP), each of which trades at a big price-to-earnings (P/E) premium relative to the broader market? Or maybe you're more of a value fan and favor the apparently discounted likes of Medtronic (NYSE:MDT), NCR (NYSE:NCR), and Capital One (NYSE:COF) -- major players in their respective industries that currently trade with below-industry P/Es and stock prices well off their 52-week highs.
No matter what your investment profile happens to be, the bottom line is that you need an asset-allocation game plan, one that's designed to insulate your nest egg from potential crack-ups.
The Foolish upshot
When it comes to that job, I think the smart move is to anchor your portfolio with well-chosen mutual funds and then supplement those picks with individual stocks that match your investment profile.
The Fool, of course, provides information aplenty when it comes to zeroing in on the market's most promising stocks -- and avoiding its dogs. Not coincidentally, we do precisely the same thing at Champion Funds, except that we focus -- duh! -- on funds.
What's more, in addition to recommending our favorite individual funds, we also offer three model portfolios -- starter asset-allocation kits you can tweak and tailor to your heart's content. And performance-wise, it's so far, so good: Since launching Champion Funds more than two years ago, we've left the market in the dust, beating it by more than seven percentage points. Our model portfolios are all outperforming their benchmarks, too.
If you'd like to take a look at our list of recommended funds, model portfolios, back issues, and members-only discussion boards, a free 30-day guest pass to Champion Funds is yours for the taking. Just click here to get started. A well-insulated portfolio awaits!
This article was originally published on April 11, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication, he didn't own any of the securities mentioned above. Leuthold Core Investment is a Champion Funds recommendation. You can check out the Fool's strict disclosure policy by clicking righthere.
