Follow the Leader for Solid Mutual Fund Returns

In sports, the need for an offense and defense is obvious. It's a little more subtle to realize that our actions throughout our lives represent an ebb and flow of offensive and defensive movements.

It should come as no great surprise that an effective mutual fund portfolio should have an offense that is creatively employed in up markets, and a defense that is always ready to ensure its survival in down markets. I like to see a portfolio that will capture at least 80% of an up market, and no more than 50% of a down market. So if the market (the S&P 500) is up 10%, I'm very happy to achieve 8%. On the flip side, if the market is down 10%, a 5% loss tells me the defense is doing its job.

When the print and TV media suggest that a portfolio, or even a fund, must match the performance of any given benchmark on a quarterly or yearly basis, they do a great disservice to the investing public. To encourage changes in a portfolio on a short-term basis can wreak havoc to a long-term strategy. A "top 10" quarterly list of mutual funds is perhaps the most useless list of information anyone could use.

You should avoid what is "hot" now and stay away from the latest fads. This is not how you accumulate wealth. Using mutual funds, you choose your investments by knowing how the management of a fund works and how it fits in your portfolio. For instance, my sample portfolio on July 6 features some great managers. The one I want to highlight this week is American Funds' (CAIBX Quote)Capital Income Builder (CAIBX). This is a core holding that can invest in any asset class, as well as foreign markets.