There are many here among us, Bob Dylan once sang, who are hard-core stock jocks. OK, Dylan didn't sing that last part, but it's true anyway. Finance geek that I am, though, I'm not an investor of the stock-jock persuasion.
Don't get me wrong: I am a number-crunching Fool, and I can happily while away the hours running screens for, say, long-haul overachievers that have lagged the S&P for the year to date through last Friday's market close. Apple
Companies with juicy earnings-growth prospects but below-market price-to-earnings ratios -- such as Microsoft
Earlier this year, for example, Intuitive Surgical shares tumbled more than 17% in a single day after the company beat earnings estimates, although not by as much as investors had hoped. For prospective investors, that was good news: When Wall Street overreacts and an otherwise solid company falls hard, it can be a fine time to add its name to your "further research" list. All the better to buy low (or at least lower) in anticipation of selling high.
Ultimately, when it comes to individual stocks, I'm mainly a window shopper: I own only as many as I have time to research and follow. Meanwhile, the bulk of my nest egg is plunked down on what Vanguard founder Jack Bogle has termed "the finest vehicle for long-term investing ever designed": mutual funds.
Bogle is an indexing fan, while I favor active picks, but the man has it exactly right in my view. If you have plenty to do already -- a full-time job and friends and family you want to spend time with -- world-class mutual funds should form the cornerstone of your portfolio.
Rather than spending countless hours struggling with the commentary of error-prone analysts or decoding cryptic (and frequently misleading) earnings announcements, your fund research can take the form of a straightforward job interview -- with you on the hiring side of the table.
When you're in the market for a mutual fund, you should ask:
- How long has the fund's manager been at the helm?
At least five years (and preferably longer) is the answer you're looking for here.
- How has the fund fared on that manager's watch?
Past performance doesn't tell you a thing about a fund's prospects if it doesn't reflect the work of its current stock picker in chief.
- Does the manager invest in the fund?
If not, why should you?
- How has the manager fared in up markets and in down markets?
When you have a talented manager in charge, market slumps can represent prime buying opportunities -- and fat gains for shareholders over the long haul.
The Foolish bottom line
There are other moving parts, but those four questions will go a long way toward helping you focus on the cream of the fund industry's crop. I asked (and answered) each of those questions while I headed up the Fool's Champion Funds newsletter service.
And now, I ask the same questions -- and then some -- as advisor to the Fool's new Ready-Made Millionaire service, which is a compact real-money portfolio made up of four stocks, three mutual funds, and one high-octane ETF.
The Fool has invested a million bucks of its own money in our set-and-forget lineup, and we plan to reopen the doors to new members early next year. In the meantime, you can learn more about the service and snag a special report -- The 11-Minute Millionaire -- by clicking here. The report is absolutely free, and we'll be sure to notify you when RMM reopens. Convenient, no?
This is an updated version of an article first published Feb. 20, 2007.
Shannon Zimmerman does not own any stocks mentioned. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Microsoft and Nokia are Inside Value choices. Apple is a Stock Advisor pick. You can check out the Fool's strict disclosure policy.