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 another 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 SPDRs (AMEX:SPY) exchange-traded fund shed some 33% of its value.

The fund's stock holdings have recently included Procter & Gamble (NYSE:PG) and Tyco International (NYSE:TYC). US Bancorp (NYSE:USB) makes the portfolio's cut, too, and while you wouldn't expect such a fund to lead the pack when racier equities dominate, finding funds that strike a growthier profile can be light work. In a recent Champion Funds update, I zeroed 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 Cisco Systems (NASDAQ:CSCO) and IBM (NYSE:IBM) among its top holdings. Since tapping this one for our members, the fund has returned roughly 55%, outpacing the market by a healthy margin along the way.

The Foolish bottom line
In my mind, 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 hang on to your wealth in turbulent markets.

We strive to choose carefully at Champion Funds. So far, so good: Since opening for business more than three years ago, all but two of our picks have made money for shareholders, and despite all the recent volatility, our biggest decliner is off by less than 4%. 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.

This article was originally published on June 12, 2007. It has been updated.

Subscribe to 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. 

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. Tyco is a Motley Fool Inside Value recommendation. You can check out the Fool's strict disclosure policy by clicking right here.