I wrote earlier about Jeremy Grantham, the whip-smart money manager who thinks we're in the midst of a worldwide bubble. Grantham has been bearish for some time now, and in light of the market's recent sell-off -- and its current torpor -- it's worth asking: Is this the way a bubble bursts? And if so, how should savvy types proceed?
Answering machine
The good news is that -- whether the market is gearing up for a downturn or simply taking one of its occasional bull-run breathers -- long-haul types don't have to make any sudden moves. Indeed, provided they've put together a portfolio that provides carefully calibrated exposure to the market's various cap ranges, asset classes, and styles -- i.e., where an investment falls on the market's growth-value spectrum -- downturns can represent opportunities.
What's that? Careful calibration hasn't exactly been a part of your investment, ahem, strategy? Not to worry: Constructing a portfolio that can help insulate your nest egg from crack-ups is easier than you think.
No, really
Unlike individual stocks, world-class mutual funds target specific areas of the market, meaning that if you'd like to batten down the hatches -- at least on a relative basis -- you can snap up shares of an ace large-cap value fund. Indeed, one such fund -- a recommendation of the Fool's Champion Funds service -- rang up a gain of 75.7% between March 2000 and December 2002, a period that saw the S&P 500-tracking Vanguard 500 Index (FUND:VFINX) shed some 33.1% percent of its value.
Top stock holdings here recently included Coca-Cola (NYSE:KO), Pfizer (NYSE:PFE), and Kraft Foods (NYSE:KFT), and while you wouldn't expect such a fund to lead the pack when racier equities lead the way, finding funds that strike a growthier profile can be light work, too. In the Champion Funds update that hits the streets tomorrow, I zero in on core criteria savvy growth investors can use to cherry-pick the fund industry's best bets. Among other things, prospective investors will want to gauge a fund in terms of:
- Standard deviation: This measurement of a fund's range of performance motion can provide insight into whether investors should expect a smooth ride -- or a roller-coaster experience.
- Portfolio valuation metrics: Are the fund's managers spendthrifts or cheapskates when it comes to buying stocks? Inquiring minds need to know!
- Absolute and relative performance: How a fund stacks up compared with like-minded peers -- and in terms of its take-home return -- are critical pieces of the puzzle, too.
In the update, we also name names, including that of a large-cap growth fund that counts Joy Global (NASDAQ:JOYG), Oracle (NASDAQ:ORCL), and ConocoPhillips (NYSE:COP) among its top holdings. Since tapping this one for our members, the fund has returned nearly 50%, outpacing the market by a double-digit margin.
The Foolish bottom line
To my way of thinking, the best way to prepare for the market's inevitable bull and bear cycles is to design a smart portfolio that can help preserve and grow your nest egg through up markets and down. Funds aren't volatility-free, of course, but when chosen carefully, they can help you do just that.
Choosing carefully is what we strive to do at Champion Funds, and so far, so good: Since opening for business more than three years ago, all but one of our picks has made money for shareholders, and, taken together, they've beaten the market by roughly 14 percentage points, too. If you'd like to see our winners list -- including the funds I've profiled above -- click here for a free 30-day guest pass. 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. Coke and Pfizer are Motley Fool Inside Value picks. Kraft is an Income Investor selection. You can check out the Fool's strict disclosure policy by clicking right here.
