So, do you feel like selling every single stock you own and stashing all of your retirement savings under the mattress?

I admit, the thought has crossed my mind recently! After watching the Dow lose more than 20% of its value in one week, well, it's hard not to wonder when the market will stop its free fall.

But I know better than to try to predict -- and therefore time -- the market, since we've seen again and again that trying to do that just doesn't work. So where can we, the long-term investors who want to stick it out and continue investing, turn?

Well, it turns out there's one investment that has been proven to beat the market in difficult times like these.

Proof positive
A study that the FPA Journal reported on a few years ago addressed the long-standing debate between actively managed mutual funds and indexing. The authors looked at Morningstar return data for more than 12,000 mutual funds over a 25-year time period and, not surprisingly, concluded that indexing tended to outperform most actively managed funds over the long run.

That wasn't exactly news. In fact, we here at Motley Fool Champion Funds have long cited the statistic that roughly 75% of funds underperform the market over the long run.

But the study also found one exception: Actively managed funds left indexes in the dust when the economy was either going into or out of a recession.

And that makes sense. After all, during particularly volatile times, active managers can address economic troubles or unwieldy valuations, while index funds have to mirror their underlying metric.

Since the odds are pretty good that we're either in a recession or recession-bound, sooner or later we'll have to pull out of it -- and while index investing may be the ticket to riches in some environments, challenging times call for the unique insight and human abilities of an active manager.

You can always hold on to broad market exchange-traded funds like SPDRs (NYSE:SPY) or the iShares Russell 1000 Index (NYSE:IWB), but if you want to stay ahead of the market in a recession, an actively managed fund may be just the thing to breathe some life back into your moribund portfolio.

The best of the best
But given that most actively managed funds don't beat the market over the long run, you still have to hunt around to find the actively managed fund that will be a net gain for your portfolio over the long haul -- and that means finding a good manager.

As I've said before, we have three rules of thumb for good managers:

  • Tenure.
  • Performance.
  • Consistency.

Find a good manager, and you've probably found a good fund. For example, one of our recent small-cap fund recommendations currently ranks in the top 1% of all small blend funds for 2008. The fund's manager has been with the fund since 2000 -- which means he's negotiated a bear market before, and he continued to outperform the market even then.

So what is he doing now? He's responded to the macroeconomic climate by recently paring back on certain energy and financial names, such as Exterran Holdings (NYSE:EXH) and Sterling Financial (NASDAQ:STSA). They've been replaced by holdings less sensitive to the current climate, such as Longs Drug Stores (NYSE:LDG), which is up almost 50% this year. Other recent additions include Interactive Brokers Group (NASDAQ:IBKR) and American Oriental Bioengineering (NYSE:AOB), which were snapped up at lowered prices, as a result of the market turmoil.

This fund has been thriving, not just surviving, in today's market -- and it's not the only outperformer on our scorecard. You can find out the name of this top-ranking small-cap fund, as well as view all of our fund recommendations today, with a free 30-day trial to Champion Funds. Just click here to get started -- there's no obligation to subscribe.

Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. American Oriental Bioengineering is a Motley Fool Hidden Gems pick. The Motley Fool owns shares of American Oriental Bioengineering and SPDRs. Click here to find out more about the Fool's 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.