For an upcoming issue of the Fool's Champion Funds investing service, I recently spoke with a world-class money manager who reminded me of Warren Buffett's famous rules of investing:
- Don't lose money
- Don't forget rule No. 1.
Truer words ne'er were spoken! The miracle of compound interest can be all the more miraculous, after all, when you concentrate on preserving your principal, as well as on growing it. To borrow a phrase from another investing luminary, Vanguard founder Jack Bogle, it's just a matter of humble arithmetic.
Spread your bets
That's true, of course, whether you're a buttoned-down conservative type or an aggressive investing daredevil. Good thing, then, that there's an investment vehicle that can meet investors of all stripes, so to speak, where they live: mutual funds.
Funds provide a built-in cushion against performance gyrations because a fund share represents not a stake in just a single company but rather a whole portfolio of them. The upshot is that, while funds aren't free from volatility, they're far less risky than individual equities.
After all, when you own a stake in a portfolio that holds energy titans such as ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP), tech companies like Hewlett-Packard (NYSE:HPQ) and RF Micro Devices (NASDAQ:RFMD), and financial concerns such as Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Loews (NYSE:LTR), your fortunes won't rise and fall with those of a single company or, for that matter, a single industry.
Batter up!
As it happens, each of the aforementioned companies recently appeared in the portfolio of one of Champion Funds' strongest performers, a pick that's appreciated to the tune of 43.6% since I first recommended it, clobbering the S&P by nearly 20 percentage points in the process.
That's a fine showing, but the stat that I'm proudest of at our service is that all but four of our recommendations have made money for members. That gives Champion Funds a batting average of .909, and what's more, our biggest "loser" is off by just 3.7%.
Compare that with your stock holdings -- and with Buffett's rules -- and call me in the morning!
All kidding aside
The fact is, individual stocks and funds can live peacefully and profitably in your overall portfolio. And I would argue that they should. Laying a foundation of world-class mutual funds and then building on it with cherry-picked companies that you actually have time to research and follow just makes Foolish investing sense.
The key, of course, is to zero in on funds that are actually worth owning, which is no small feat. The vast majority of them, after all, make you pay for the privilege of underperformance.
With a core set of principles in mind, though, it's possible to separate the keepers from the duds. How long a manager has been at the helm is an important question to ask and answer before taking a fund's plunge, for example. So too is whether a fund that looks cheap is really just a "index hugger" in disguise. There's no sense paying any premium at all for a fund that simply tracks its benchmark like a shadow. Cheaper index picks, after all, are readily available.
The Foolish bottom line
There are other moving parts when it comes to savvy fund investing, of course, and if you'd like to see how we put 'em all together, consider taking Champion Funds for a risk-free spin. You'll have 30 days to peruse the service that's designed to help you beat the market without all that pesky volatility.
Your guest pass provides full access to every column inch of advice I've offered members, as well as our model portfolios, members-only boards, and of course, our complete list of recommended funds. So click here to give it a go -- and to improve your own investment batting average.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises GreenLight with his pal Dayana Yochim. At the time of publication, Shannon didn't own any of the securities mentioned above. Bank of America is an Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.
