Intelligent investors don't come in one shape or size, and neither do market-beating strategies. I have my favorite approach (see No. 3 below), but choosy types have options. Here are three of 'em:
1. Be a bear.
If you're the pessimistic type, you can stuff your nest egg under a mattress (or into fixed-income investments) and hope that stock prices fall. Pessimists of the daredevil persuasion, meanwhile, can "short" the market, tantamount to actively betting that equities will hit the skids.
The trouble with this strategy, of course, is that over time, stock prices have risen, giving long-term types a big bang for their investment bucks. The upshot? As formulas for beating the market, staying on the sidelines or betting on a downturn are short-term solutions. They might work over a particular market cycle -- see 2000 to 2002 for the gory details -- but if history is any guide, investing in (rather than against) the market is the better tack. That leads us to ...
2. Be a bull.
Folks with the time and inclination to research and invest in individual stocks can beat the market. Just ask shareholders in the likes of Southwest Airlines
That's also true of DR Horton
But while cherry-picking individual winners packs plenty of rearview-mirror appeal, it's easier said than done. Indeed, of all the aforementioned stocks, none has made money for shareholders over the trailing 12 months that ended with Monday's market close. That may be good news for prospective investors, but current shareholders may be licking their wounds.
That point underscores the riskiness of hitching your nest egg to a portfolio of individual picks, but not to worry: If you hate losing money, but still want to beat the market, consider option No. 3.
3. Be a realist.
For my money, world-class mutual funds are the best vehicle for the lion's share of your long-term investment dollars. The diversification that funds provide takes the edge off the market's occasionally sharp turns. They make it relatively easy to assemble a razor-sharp portfolio, too: From emerging markets to municipal bonds, mutual funds have all the asset classes covered.
The question, of course, is how to identify worthy prospects -- the kind of picks worth building your portfolio around.
The answer -- or at least a part of it -- is to look for funds with below-average price tags and managers whose long-term track records indicate that they know how to navigate both downturns and upswings. Those are among the core criteria at the Fool's Champion Funds newsletter service, where, taken collectively, our picks have bested the market by more than 13 percentage points.
If you'd like to sneak a peek at our winners list, click here to snag a completely free 30-day guest pass. I'm a fund geek, of course, but I think even folks who invest primarily in individual stocks can benefit from laying a rock-solid foundation of cherry-picked funds. The challenge, of course, is finding those worth picking.
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This article was originally published on Jan. 2, 2007. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service. At the time of publication, he didn't own any of the securities mentioned above. Quest Diagnostics is a Motley Fool Inside Value pick. You can check out the Fool's strict disclosure policy by clicking right here.