Get out your No. 2 pencils. It's time for a pop quiz!
- During the past year, Amgen
(NASDAQ:AMGN), Motorola (NYSE:MOT), and Marvell Technology (NASDAQ:MRVL)have all suffered double-digit declines while the S&P 500 has notched a gain of more than 20%. True or False: Against that backdrop, savvy investors should pull the plug on individual stock picks and just plunk down their hard-earned moola on a dirt-cheap index fund such as Vanguard 500 (FUND:VFINX).
(NASDAQ:MSFT), Verizon (NYSE:VZ), and McDonald's (NYSE:MCD), on the other hand, have all climbed more than 30% over the past 12 months and now sport price-to-earnings ratios that surpass that of the S&P 500. True or False: Intelligent investors should head for the exits. In light of those high-octane returns, it's a safe bet that there are better bargains to be found.
- Nearly a year ago (and earlier this year), the market experienced a meaningful pullback. The next time that happens, you plan to:
A) Plow fresh money into the market, hoping to snap up quality stocks on the cheap.
B) Open a "mattress" savings account and make a large deposit.
How'd you do?
Your answers to each of the questions above can reveal a lot about your temperament as an investor, but truly smart investment choices require additional information.
For the first question, for example, we'd need to mull the reasons for the declines. Have company-specific fundamentals eroded, dinging the firms' ability to grow earnings and generate free cash flow? Or has Wall Street hand-wringing over macroeconomic concerns simply dimmed their luster -- along with that of their industry rivals?
Question No. 2, meanwhile, could benefit from a replay of what investing great Peter Lynch calls a "two-minute drill" (i.e., an investing thesis) in order to see if these winners have additional room to run.
Finally, given my own investing temperament, A is my easy answer to question No. 3. However, it's well worth remembering that sometimes pullbacks just keep pulling. (See the first couple of years of the 2000s for the grizzly details.) The bottom line: Investing against the grain can be a contact sport, and it's best to prepare for volatility along the way.
Pie charts and profits
Designing an asset-allocation game plan -- a personalized investing pie chart -- is one smart way of doing just that. Filling it out with world-class mutual funds is another. With funds, you can tamp down your portfolio's potential for pesky performance gyrations by designing a blueprint that provides carefully calibrated exposure to the market's various cap ranges and its growth/value spectrum.
And while with funds you hire a manager to make the tough buy and sell decisions, you can still satisfy your "hands-on" investing impulse. Savvy types, for instance, will want to vet the managers they hire, researching their track records to see how they've fared through up markets and down and asking whether these honchos invest their own loot alongside their shareholders'.
Steal this homework!
That's precisely the kind of homework we do each month at the Fool's Champion Funds investing service, and more than three years in, our test scores are pretty darn good: All but one of our recommendations has made money for shareholders, and taken collectively, our list o' picks has beaten the market by more than 13 percentage points.
Want to look over our shoulder and sneak a peek at our answers? No problem. A free 30-day Champion Funds cheat sheet is yours for the taking. Just click here to get started. There's no obligation to subscribe.
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. Microsoft is a Motley Fool Inside Value recommendation. You can check out the Fool's strict disclosure policy by clicking right here.