These days, everyone's gaga over the Dow's lofty heights -- even me. Sure, Dow 13,000 was just an arbitrary milestone -- but still, like observing your odometer as it rolls over to a fresh set of zeroes, it was fun to watch anyway. Plus, to the extent that the market's recent rise reflects investor optimism about corporate fundamentals and earnings -- as opposed to a top-down assessment of economic trends -- 13,000 is an arbitrary marker with investing substance behind it.
Call it the best of both worlds.
Alas, what goes up ...
... usually comes down. See February's nosedive for details. Or the one we lived through last summer. Or, for a more dramatic example, the meltdown that occurred in early 2000.
As you may painfully recall, the market tumbled hard then -- and for quite a long while, too. Indeed, between March of that year and the close of 2002, the S&P-tracking SPDRs (AMEX:SPY) declined by 33%. Meanwhile, the Cubes exchange-traded fund (QQQQ) -- which tracks the Nasdaq 100 and counts Oracle (NASDAQ:ORCL), Qualcomm (NASDAQ:QCOM), and Comcast (NASDAQ:CMCSA) among its top holdings -- shed some 77% of its value over the period.
With those cautionary tales in mind, savvy investors should strive to fix their portfolios while the sun is shining, in part by ensuring that their basket of investments is spread intelligently across the market's valuation spectrum. Buttoned-down "value" stocks, for example, tend to hold up better than growth-oriented fare during downturns. Case in point: During the period cited above, the Russell 1000 Value bogey -- which specializes in the likes of Pfizer (NYSE:PFE), Kraft Foods (NYSE:KFT), and AT&T (NYSE:T) -- declined by "just" 4.7%, while the S&P and Nasdaq 100 plunged into double-digit downward spirals.
Things are looking up
Some investors, meanwhile, actually made money over that stretch of time. Indeed, in the May issue of Champion Funds, we recommend a fund that posted a gain of more than 28% while the aforementioned indexes were headed south. This fund, in other words, plays a mean defense, and over time, its rewards have been plentiful.
And that's true, by the way, of the overall Champion Funds track record. Not to brag or anything (OK, maybe just a little), but since opening for business more than three years ago, all but one of our recommendations has made money for shareholders. Our only decliner, by the way, is off less than 1%, and taken collectively, our list o' picks is up on the market by more than 13 percentage points.
The Foolish bottom line
Contrarian that I am, I think a great way to celebrate Dow 13,000 is by preparing for the market's all-but-inevitable next pullback -- in other words, plan for the bad when times are good. Even if you invest primarily in individual stocks, it can pay (literally!) to lay down a foundation of world-class mutual funds before assuming the greater risk that comes with individual equities. If you need a few fund ideas, Champion Funds can help. Check us out with a risk-free spin -- there's no obligation to subscribe.
This article was originally published on April. 24, 2007. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Pfizer is a Motley Fool Inside Value recommendation. Kraft is an Income Investor pick. You can check out the Fool's strict disclosure policy by clicking right here.
