"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 Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC), Home Depot (NYSE:HD), and Wyeth (NYSE:WYE), all of which have posted annualized losses for the 10-year period that ended with December. Indeed, even a low-cost bogey-tracking ETF like SPDRs (SPY) has declined by roughly 1.5% 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 Research In Motion (NASDAQ:RIMM), Qualcomm (NASDAQ:QCOM), and Nokia (NYSE:NOK). OK, let's do. Through Monday’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
Sound like a winning "cheat sheet" to you? Good deal. Go forth and invest ... Foolishly. And if you'd like to see that plan in action, click here and we’ll notify you as soon as the Fool’s Ready-Made Millionaire service reopens to new members. RMM features a long-haul, set-and-forget lineup built on funds that strike the profile above. And we aim to juice our returns with a clutch of individual stocks -- highly profitable companies with loads of free cash flow -- and an ETF that doubles up on an area of the market that we think is significantly undervalued.
Between now and our reopening, we invite you to come in, kick our conceptual tires, and snag -- for the low, low price of nothing -- a special free report, The 11-Minute Millionaire. Designed to help you navigate up markets and down, our Foolish write-up will provide plenty of food for thought -- and action! Click here to get going.
This article was originally published Oct. 31, 2006. It has been updated.
Shannon Zimmerman owns none of the securities mentioned above. Coca-Cola, Home Depot, and Nokia are Motley Fool Inside Value choices. Bank of America is an Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.
