Market sell-offs are painful, and adding insult to injury is that their pain isn't distributed equally -- at all. Just ask shareholders of Pfizer (NYSE:PFE), IBM (NYSE:IBM), and BP (NYSE:BP), three companies that are more than 30% below their 52-week highs through Monday's market close. Meanwhile, while the market has been in free fall over the last 12 months, Wal-Mart (NYSE:WMT), Genentech (NYSE:DNA), and General Mills (NYSE:GIS) have actually managed to notch gains.

Bandages for your portfolio
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: GE (NYSE:GE), for example, has posted a negative annualized return for the five-year period that ended Monday. And while funds are hardly immune to volatility, a carefully calibrated portfolio of picks stands a much better chance of standing up over the long haul.

It's even possible to make money during sell-offs. Take, for example, Yacktman (YACKX), one of the funds I recommended back when I was running point on the Fool's Champion Funds newsletter service. Between 2000 and 2002, that puppy racked up a gain in excess of 50% while the market was tanking to the tune of more than 37%.

And make no mistake: Funds -- at least the kind that we focus on -- can provide plenty of participation during bull runs, too, particularly when they're paired with stocks whose forward-looking earnings-growth prospects aren't even close to reflecting their value.

That's what we strive to do at the Fool's Ready-Made Millionaire, where the bedrock principle behind our compact, set-and-forget portfolio is this: A carefully vetted selection of Grade A mutual funds and deeply discounted stocks is the kind of lineup worth building your nest egg around.

Needle in the haystack
That said, when it comes to 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 (SPY). 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. That's a precept we put into practice at Ready-Made Millionaire, which offers something of an investment two-for-one: We've cherry-picked the fund industry's brightest prospects for our members, rounded out our line up with four stocks and an ETF we think will outperform the market, and we've put these picks together in a carefully calibrated portfolio. It's been a tough market, to be sure, and our portfolio has taken its lumps as well. In our recently released quarterly report, though, we re-vetted and reaffirmed our original investment thesis for each selection, and here's the verdict: We think our portfolio is a veritable blue-light special.

RMM will open to new members early in the new year. In the meantime, we invite you to learn more about the service and grab a free copy of our The 11-Minute Millionaire special report by clicking right here. Read up, prep for the market's next upswing, and we'll see you in just a matter of days!

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

Shannon Zimmerman is the lead analyst for the Fool's Ready-Made Millionaire service. Pfizer and Wal-Mart are Motley Fool Inside Value recommendations. Pfizer is also an Income Investor choice. Yacktman is a Champion Funds pick. The Motley Fool owns shares of Pfizer and SPDRs. The Fool has a strict disclosure policy.