Market volatility is painful, and adding insult to injury is that the pain isn't distributed equally -- at all. Just ask shareholders of Comcast (NASDAQ:CMCSA) and Washington Mutual (NYSE:WM), two companies that have shed more than 15% of their value during the past three months. Limited Brands (NYSE:LTD), Electronic Data Systems (NYSE:EDS), and Harley-Davidson (NYSE:HOG) have declined by even more. Ouch.

A portfolio Band-Aid
Then there's the fate of fund investors versus folks whose portfolios include just individual picks. Even seemingly conservative plays can suffer protracted periods of decline -- Gannett (NYSE:GCI) and banking concern Popular (NASDAQ:BPOP) have posted negative returns for the five-year period that ended with yesterday's market close. And while funds are hardly immune to volatility, a carefully calibrated portfolio of picks stands a much better chance of standing up during downturns.

It's even possible to make money during sell-offs. For example, one of the funds we've recommended to members of the Fool's Champion Funds -- the investment service that I head up -- racked up a gain in excess of 50% while the market was tanking to the tune of more than 37% between 2000 and 2002.

And make no mistake: Funds -- at least the kind that we focus on -- can provide plenty of participation during bull runs, too. All but one of our picks have made money for shareholders since we recommended them. As a group, they're beating the market by a healthy margin, too.

Needle in the haystack
With funds, of course, it pays to be a snob. The vast majority of 'em can't keep pace with a dirt-cheap index tracker like SPDRs. But if you focus on certain key attributes, you can go a long way toward finding the needles in the fund industry's haystack.

No single metric is determinative, but cost is crucial because every basis point of expense represents a higher hurdle that money managers have to clear just to stay within spitting distance of their expense-free benchmark. And while it's an investor's after-tax return that ultimately matters most, getting attuned to tax efficiency is important when it comes to determining which kind of account (taxable or tax-favored) is the best holding pen for a pick. Managerial tenure is vital information, too: A fund can only be as strong as the honchos who are calling the shots now.

The Foolish bottom line
If you want to be a savvy investor -- not to mention a smiling one -- zeroing in on those three items can help narrow the universe of funds down to just those that are worth considering for your portfolio.

Which brings us back to where we began: Even investors of the stock-jock persuasion can benefit from a sneak peek at the fund industry's best and brightest. When the kind of money managers who have made our grade make moves in their portfolios, that kind of information just might prove helpful when it comes to managing your portfolio. Champion Funds can help that cause. We go about the business of cherry-picking the industry's brightest prospects for our members. You can check out all of our picks and research with no risk -- click here for more information.

This article was originally published on July 31, 2007. It has been updated.

Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service. He doesn't own any of the companies mentioned. Washington Mutual, Limited Brands, and Popular are Motley Fool Income Investor recommendations. The Fool has a strict disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.