The Easiest Way to Reduce Your Risk

Nov. 1 was a painful day for many investors. These numbers paint a pretty clear picture of just how bad it was:

Index

Close on
10/31/2007

Close on
11/1/2007

Percentage
Change

Nasdaq

2859.12

2794.83

(2.2%)

DJIA

13930.01

13567.87

(2.6%)

S&P500

1549.38

1508.44

(2.6%)

The damage was spread widely among all the major market barometers. Yet the index numbers alone leave out one simple fact. For an index to have fallen so far, some of the stocks that make up that index had to have fallen even farther. As bad as it may have looked to the broader market, investors in these stocks (all part of at least one of the indexes mentioned above) fared even worse:

Company

Close on
10/31/2007

Close on
11/1/2007

Percentage
Change

Costco Wholesale (Nasdaq: COST  )

$67.26

$64.86

(3.6%)

Simon Property Group (NYSE: SPG  )

$104.33

$100.42

(3.7%)

Electronic Arts (Nasdaq: ERTS  )

$61.12

$58.74

(3.9%)

Kroger (NYSE: KR  )

$29.39

$28.20

(4.0%)

Monster Worldwide (Nasdaq: MNST  )

$40.58

$38.90

(4.1%)

Ford (NYSE: F  )

$8.87

$8.50

(4.2%)

Bank of America (NYSE: BAC  )

$48.28

$45.71

(5.3%)

Control the pain
Though it's often overlooked during a raging bull market, when nearly everything rises, these tables highlight a huge benefit of owning mutual funds over individual stocks. When the market turns sour, funds diversified across many stocks simply won't fall as fast as some of their individual component companies.

A loss is still a loss, and it's still not pleasant. But given a choice is between losing 5% or more in an individual stock, or dropping merely half as much thanks to the automatic diversification cushion provided by a fund, which would you prefer?

Sure -- if you've already got a fairly large portfolio, you can branch out on your own to get the same protection. If you're just starting out, though, it can get expensive to do so on your own. After all, even in the era of discount brokers, commissions can still take a huge chunk out of your portfolio if you're buying several stocks to build your diversified base.

Get there cheaply
Regardless of whether you're the go-it-alone type investor, or willing to get some help along the way, it's critical to control the costs you pay to invest. After all, every dollar you pay, either as a commission or as a fund management fee, is a dollar that stops working on your behalf.

If you pay too much for the cushion you get by having a broad portfolio, the benefits of that cushioning may not be worth the absolute costs to your pocketbook. After all, how much good does it really do you to see your portfolio only drop 2% instead of 5%, if you lost an additional 4% to a sales commission along the way?

That's why, at Motley Fool Champion Funds, we urge investors to maintain a laser-like focus on finding only funds that truly earn their fees. The lower their costs, the more their benefits can be passed on to you. We're so serious about keeping costs down that we offer a full scope of our service -- including all the funds we've picked -- for 30 days, free of charge. If you'd like to see those picks, or learn more about our philosophy, simply click here to get started.

Costco and Electronic Arts are Stock Advisor picks. Bank of America is an Income Investor recommendation.

At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America, and his wife owned shares of Kroger. Chuck admitted that companies he and his wife own fell that far, that fast? That just shows how serious the Fool is about its strict disclosure policy.


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