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 volatility this year, 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 or not the market is gearing up for a downturn -- 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 (VFINX) shed some 33% of its value.

Stock holdings here recently included Microsoft (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ). Anheuser-Busch (NYSE:BUD) and American International Group (NYSE:AIG) make the portfolio's cut, too, 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. In the current Champion Funds update, I zero in on core criteria that 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 also critical pieces of the puzzle.

In the update, we also name names, including that of a large-cap growth fund that, at the end of March, counted Boeing (NYSE:BA) and Freeport-McMoRan Copper & Gold (NYSE:FCX) among its top holdings. Since tapping this one for our members, the fund has returned 54.3%, 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 the market's ups and downs. 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. So far, so good: Since opening for business more than three years ago, all our picks have made money for shareholders, and, taken together, they've beaten the market by a double-digit margin. If you'd like to see our winners list -- including the funds I've profiled above -- click here to take Champion Funds for a risk-free spin.

Try Champion Funds now and the Fool's latest premium report -- "The NEW Rule Makers: 5 Power Stocks You'll Never Want to Sell" -- is yours free. You'll also have access to our latest special reports: "The Challenge: ETFs vs. Mutual Funds" and "Add Kick to Your 401(k)!" Just click here to snag the reports (which are yours to keep) along with a risk-free Champion Funds membership. 

This article was originally published on June 12, 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. Anheuser-Busch and Microsoft are Motley Fool Inside Value picks. Johnson & Johnson is an Income Investor pick. You can check out the Fool's strict disclosure policy by clicking right here.