"No pain, no gain" is my least favorite truism, particularly when it comes to investing. "Greater risk leads to greater rewards" is the relevant maxim there, but I'm not buying it. It's entirely possible to beat the market while sleeping peacefully at night with a portfolio that includes stocks but is anchored by world-class mutual funds.
No, really
Don't get me wrong. I love researching individual stocks as much as the next Fool. That said, the lion's share of my own investment moola is parked in world-class mutual funds for a very simple reason: When it's your nest egg you're talking about, crack-ups can be painful indeed.
Just ask longtime shareholders in companies like GE (NYSE: GE), Microsoft (Nasdaq: MSFT), and Pfizer (NYSE: PFE) all of which have posted annualized losses for the 10-year period that ended with November. Indeed, even a low-cost bogey-tracking ETF like SPDRs (AMEX: SPY) has declined by roughly 1% over that period, a mark that plenty of actively managed funds have left in the dust.
What's more, if buying to hold even stocks that seemed like conservative bets at the time can lead to plenty of pain without much gain, let's not even discuss erstwhile highfliers such as Oracle (Nasdaq: ORCL), Apple (Nasdaq: AAPL) and Amgen (Nasdaq: AMGN). OK, let's do. Through Wednesday's market close, each of those companies traded at a price that's more than 30% below its five-year high. Thirty percent!
Ouch
With those prominent cases in point, I think the case is clear: When it comes to buying individual stocks, the smartest path is to hold just a clutch of names that you actually have time to research and follow.
The bulk of your moola, meanwhile, should be working overtime in funds that sport the following key criteria.
- A dirt cheap price tag. The typical fund will make you pay roughly 1.5% for the "privilege" of underperformance. Don't fall for it. With funds, you typically get what you don't pay for.
- An experienced manager. Past performance can look great in a glossy brochure, but if a fund's track record doesn't belong to the current head honcho, it doesn't mean anything.
- Strategic consistency. A manager who chases last year's hot properties is bad news. Look for those who've stuck to their strategic guns through thick and thin. When their style is out of favor, they can buy the kind of stocks they like at a discount.
The Foolish bottom line
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This article was originally published Oct. 31, 2006. It has been updated.
Shannon Zimmerman owns none of the securities mentioned above. Pfizer and Microsoft are Motley Fool Inside Value choices. Pfizer is also an Income Investor selection. Apple is a Stock Advisor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.
