Recent volatility aside, these remain heady times for stock investors. There have been occasional downturns along the way, of course, but if the overall upswing resumes, our current bull run just might hit the five-year mark later this year.
Why "might"?
Sorry for the sour note there, and don't get me wrong: I realize that the market's historical trajectory is up. Nonetheless, I'm not averse to practicing a little risk management.
The best way to be fully invested and play effective defense is to design your portfolio with a solid asset-allocation blueprint in mind. And if at this point your portfolio resembles a postmodern architectural nightmare more than it does a Frank Lloyd Wright work of art, that's OK: The best time to fix your roof -- and your portfolio -- is when the sun is shining.
How to proceed?
When it comes to intelligent asset allocation, I'm a big fan of world-class mutual funds because they make it easy to invest, in a responsible way, in markets that may not be your area of expertise.
For example, you might opt to lay down a foundation of domestic-stock funds such as Vanguard 500 Index (VFINX) -- a passively managed stalwart that counts JPMorgan Chase (NYSE:JPM), Oracle (NASDAQ:ORCL), Boeing (NYSE:BA), and Home Depot (NYSE:HD) among its top 50 holdings. Then, you could pair that pick with Marsico Focus (MFOCX), an actively managed -- and far more concentrated -- fund that gravitates toward growth-oriented fare like Monsanto (NYSE:MON) and Google (NASDAQ:GOOG).
Then, once that foundation is in place, you can look down the market's cap range toward funds that specialize in stocks that rack up far fewer financial-press column inches than the bigger boys noted above. And let's not even talk about emerging markets and high-yield bonds. OK, let's do: For my money (literally), the best way to invest in those racy asset classes is through mutual funds helmed by managers who have proven that they know how to navigate potentially tricky terrain.
The Foolish bottom line
Faced with myriad (and mediocre) choices, how should choosy investors begin to build the portfolio of their dreams? For starters, I'd recommend focusing on the fund manager's track record rather than that of the fund itself. There's nothing inherently magical about a fund; it's the team that runs it you're really investing in. That team's strategy -- and whether they invest in the fund themselves -- should also be core criteria.
If you'd like to cut to the chase and see that blueprint in action (just to mix my metaphors), consider taking a risk-free spin of Champion Funds, the Fool investing service designed to beat the market with funds. We've been doing just that for more than three years now, and, taken together, our list of recommendations has surpassed the market's average by a double-digit margin.
By way of a preview, a recent service update takes the temperature of an ace money manager who thinks we're in the midst of a global bubble. We also offer specific, actionable advice to help prep your portfolio for pullbacks, zeroing in on a clutch of Grade-A funds that have fared well in up markets and downturns. If that kind of comprehensive investment approach sounds like your cup of tea, click here to give Champion Funds a whirl.
This article was originally published on May 8, 2007. It has been updated.
Shannon Zimmerman, lead analyst for Motley Fool Champion Funds, doesn't hold a financial position in any of the companies listed. JPMorgan is a Motley Fool Income Investor pick. Home Depot is an Inside Value recommendation. The Fool is investors writing for investors, and you can read all about our disclosure policy by clicking right here.
