This is the perfect market for cheapskates.
I don't mean that derisively. When a stock's price has hit the skids, after all, smart shoppers can snap up bargains -- and these days, there appear to be plenty of 'em. Bank of America
They may be cheap, but are they good buys? With individual stocks, the tricky part is determining whether a company's stock price has nose-dived for reasons that aren't related to fundamentals -- like general market volatility -- or whether it's cheap for a good reason. Maybe an important product launch has flopped, say, or the company has seen a steady erosion of its market share.
Dwindling levels of free cash flow (FCF) should cause you to raise an eyebrow -- probably two -- and bring out a shovel. Even if the price seems right, you'll need to dig through such a company's financials to determine if it's a worthy investment.
Spotting the difference between values and value traps can be a full-time job. And while contrarian investing is a smart way to build wealth long-term, in the short term it can be pretty volatile.
Smooth the edges
And that volatility is why mutual funds are a smart bet for contrarian investors. The advantages include:
- Smart diversification -- With well-chosen funds, your nest egg won't crack up when one company -- or even a handful of companies -- hits the skids.
- Convenient asset allocation -- Unlike individual stocks, funds make it easy to round out your portfolio's exposure to areas of the market -- such as international equities, say -- where researching individual companies (and country-specific accounting standards) could be time-consuming.
- Low costs -- Although the typical mutual fund charges too much and underperforms, plenty of cheap and compelling options exist.
The cranky cheapskate
Indeed, while I was advisor of the Fool's Champion Funds service, the average price tag of the funds I recommended to members was roughly 1%. Now I'm setting off to engineer a real-money portfolio designed to protect and grow your money.
Ready-Made Millionaire will feature a smattering of top-notch mutual funds, a select group of stocks, and an ETF or two. To find out more information about this investment service, simply enter your email address in the box below.
This is an updated version of an article first published July 6, 2007.
Shannon Zimmerman doesn't own any of the securities mentioned above. Bank of America is an Income Investor recommendation. eBay is a Stock Advisor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.