Intelligent investors don't come in one shape or size, and neither do market-beating strategies. I have my favorite approach (see No. 3 below), but choosy types have options. Here are three of 'em:
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1. Be a bear.
If you're the pessimistic type, you can stuff your nest egg under a mattress (or into fixed-income investments) and hope that stock prices fall. Pessimists of the daredevil persuasion, meanwhile, can "short" the market, tantamount to actively betting that equities will hit the skids.
The trouble with this strategy, of course, is that over time, stock prices have risen, giving long-term types a big bang for their investment bucks. As formulas for beating the market, staying on the sidelines and betting on a downturn are short-term solutions. They might work over a particular market cycle -- see 2000 to 2002 for the gory details -- but if history is any guide, investing in (rather than against) the market is the better tack. That leads us to ...
2. Be a bull.
Folks with the time and inclination to research and invest in individual stocks can beat the market. Just ask shareholders in the likes of Citigroup (NYSE: C) and Wal-Mart (NYSE: WMT). For the 10 years that ended with August, each of those companies delivered an annualized gain that surpassed the S&P 500's return over the period.
That's also true of Symantec (Nasdaq: SYMC), Staples (Nasdaq: SPLS), and SanDisk (Nasdaq: SNDK).
But while hand-selecting individual winners packs plenty of rearview-mirror appeal, it's easier said than done. Of all the aforementioned stocks, none has made money for shareholders over the trailing 12 months that ended with Thursday's market close. That may be good news for prospective investors, but current shareholders may be licking their wounds.
That point underscores the riskiness of hitching your nest egg to a portfolio of individual picks, but not to worry: If you hate losing money, but still want to beat the market, consider option No. 3.
3. Be a realist.
For my money, world-class mutual funds are the best vehicle for the lion's share of your long-term investment dollars. The diversification that funds provide takes the edge off the market's occasionally sharp turns. They make it relatively easy to assemble a razor-sharp portfolio, too: From emerging markets to municipal bonds, mutual funds have all the asset classes covered.
The question is how to identify worthy prospects -- the kind of picks worth building your portfolio around.
Foolish conclusion
The answer -- or at least a part of it -- is to look for funds with below-average price tags and managers whose long-term track records indicate that they know how to navigate both downturns and upswings. Those are among the core criteria at the Fool's Champion Funds newsletter service, where some 96% of our recommendations have made money for shareholders since we gave 'em the nod.
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