"What Is a Stock?"

That was the first chapter of a study guide my company gave me for the NASD license exam. See, I was a history major in college, so when I took a job as a broker after graduation, I had a lot to learn. But even with the study guide, nothing seemed to click. For a guy who spent most of his time in college reading about Otto von Bismarck and Napoleon, it felt like I was in another world -- and indeed I was.

In all, it took me a good two years of full-time work in the financial world -- roughly 4,000 hours -- before I felt entirely comfortable talking about different types of investing.

4,000 hours?
Yeah, 4,000 hours. As a broker, I had to know something about everything. If an investor called up looking for information on an obscure Brazilian micro-cap commodity play, I had to have an answer. Not all of us have that kind of time (and financial incentive) to learn the various sectors and styles the market has to offer. What with youth soccer games to coach, groceries to buy, and the daily grind to grind, it's certainly not your fault if researching emerging-market apparel companies never garners your full attention.

At one time, that wasn't a problem. But with the bleak long-term outlook for Social Security and the specter of underfunded corporate pensions ruining retirements across the country, the onus of planning for our financial future is falling more on our own shoulders every year.

So what's the solution? Pass the buck.

Seriously, pass the buck ...
Let's say you're fascinated by large-cap growth stocks such as Amazon.com and eBay and spend what little time you do have researching them. You know that it would be prudent to diversify your portfolio with some value plays, but you haven't the faintest idea where to begin. Instead of trying to learn value investing from the ground up, find a great value investor and let him or her do the investing for you.

See, you don't necessarily have to be a great stock picker to be a great investor -- picking the right mutual funds to complement your holdings can lead you to market-smashing returns. To be a great investor on a tight schedule, you need to:

  • Know your strengths and limitations.
  • Properly diversify your assets.

Mutual funds are managed by some of the sharpest minds in the business, who, more importantly, have the time and expertise to pick the right stocks for you. Of course, some 75% of the 7,000 mutual funds out there fail to beat their benchmark. So if you really want to pass the buck, you'll do just fine with a low-cost index fund. But if you want to do better, if you really want to drill down on what makes a great fund manager, we have some tips.

The keys to picking a great fund
Fool fund guru Shannon Zimmerman looks for three core traits when picking funds for our Motley Fool Champion Funds service:

  1. Managers with long tenures.
  2. Funds with low expense ratios.
  3. A history of outperformance.

For example, in the July 2004 issue, Shannon selected a large-cap value fund from a well-known and respected firm. He saw an ace management team with a history of superior returns that was charging one-third the fees of the average fund in its class. Since then, the fund has outperformed the S&P 500 by 20 percentage points.

This fund's top holdings include:


One-Year Return

Carnival (NYSE:CCL)


XL Capital (NYSE:XL)


Manulife Financial (NYSE:MFC)


Entergy (NYSE:ETR)


Altria (NYSE:MO)


Allstate (NYSE:ALL)


Now, imagine having to research each of these companies before buying them as individual stocks, particularly if you have better things to do on your Saturdays than pore over annual reports and 8-Ks.

More time for the important things
And the time crunch gets even worse if you want to achieve broad diversification. Fortunately, there are thousands of mutual funds that can help you round out your portfolio -- bond funds, sector funds, international funds, etc. Unfortunately, not all of them are worthy of your dollars. However, you can see a cheat sheet of Shannon's favorite funds -- his recommended funds have outpaced the S&P 500 by more than 10 percentage points since the newsletter's inception -- by test-driving Champion Funds free for 30 days.

Sound good? Just follow this link for more information.

This article was originally published on Aug. 25, 2006. It has been updated.

Todd Wenning does not own shares of any company mentioned. Amazon.com and eBay are Stock Advisor choices. The Fool's disclosure policy is a brick house.