It's been a tough past few months for Nvidia (NVDA 0.35%) and its investors. Despite being swept higher in Thursday's broad bullishness, shares of the technology giant are still down by nearly half of their peak price hit in November. And the company just warned shareholders that revenue for the quarter now underway wouldn't be as healthy as analysts were initially anticipating.

Veteran investors know, however, that some of the market's biggest rewards come from buying shares of great companies while they're beaten down. Nvidia is a great company. It's just going through a rough patch.

Before stepping into a stake in this great company, though, take a step back and consider an alternative that may be a more appropriate pick for your particular portfolio.

Storm warning

If you're reading this, then you likely already know Nvidia's only anticipating a top line of $8.1 billion for the current quarter, versus analysts' expectations of $8.4 billion. CFO Colette Kress explained during the first-quarter conference call that the company's starting to see "softness in parts of Europe related to the war in the Ukraine and parts of China due to the COVID lockdowns." She added that "the extent in which cryptocurrency mining contributed to Gaming demand is difficult for us to quantify with any reasonable degree of precision," leaving investors further guessing as to what lies ahead.

Of course, none of this is exactly new stuff for investors to digest. Even with Thursday's 6% gain, Nvidia shares are still only worth about half of what they were worth as of November, as these concerns have been priced into the stock's value for weeks now.

The headwind created by the crisis in Ukraine, continued COVID-19 lockdowns, and the implosion of cryptocurrency prices, however, are all temporary problems, even if other investors don't see it. That seemingly translates into opportunity. Like Baron Rothschild reportedly put it, "Buy when there's blood in the streets."

As is always the case, though, there's more to the story.

Not even the pros do it very well, or for very long

In this case the "more" is a question about the rest of your holdings. Namely, is your portfolio already well-founded by a diversified index fund offering you all of the stock market's upside, but also curbing the volatility that individual stocks bring to the table? It should be. Better yet, index funds also steer investors clear of the temptation to time individual entries and exits of stocks, since they're simply a means of plugging into the market's broad, long-term bullishness even if they do suffer the occasional stumble.

Statistics certainly support the idea that chasing hot stocks can do more harm than good. Take Standard & Poor's look at the performance of equity mutual funds versus the market as an example. Last year, 85% of mutual funds available in the United States failed to keep pace with the S&P 500 (^GSPC 0.03%). It wasn't just a bout of bad luck, either. Over the course of the past five years, nearly three-fourths of these funds trailed the S&P 500. For the past 10 years, the failure figure ratchets back up to 83%.

One thumb pointing up, and another pointing down.

Image source: Getty Images.

And if you think one year's winners tend be perpetual winners, think again. Only a little over half of 2019's top-performing funds were even in the top quartile in 2020. Then, in 2021, only 2.2% of 2019's market-beating funds were still among the best performers.

These fund managers are professionals, usually paid with the expectation that they'll be able to beat the market. Even with all the tools and resources at their disposal, most can't. It's even tougher for investors with other responsibilities and fewer resources to beat the market by frequently buying and selling individual stocks.

A better bet

So if not Nvidia, then what?

To be clear, if you want to step into Nvidia shares while they're down, feel free. That's especially the case if you've already got a well-diversified portfolio, and if you fully understand the unique risks of buying this particular name. Chief among these risks is not knowing exactly how long its business will be disrupted by what's happening in Ukraine and more pandemic-prompted lockdowns.

If you're just starting out, though -- or if your portfolio isn't all that well diversified -- a fund built to reflect the Nasdaq Composite (^IXIC -0.28%) or an exchange-traded fund like the Invesco QQQ Trust (QQQ -0.29%) could be an easy way to own a basket of stocks that still has most of the potential upside of Nvidia itself.

It's not the original intent, but the Nasdaq exchange has attracted more than its fair share of aggressive, successful technology companies. In addition to Nvidia, some of its top constituents include Apple, Microsoft, Alphabet, and Amazon. None of these names are in the computer processor business Nvidia is in... a business that's still growing, and a business that Nvidia is leading. That's not necessarily a bad thing, however. Most of these companies' fortunes are tethered to the others as well as the rest of the Nasdaq's key names, and each enjoys similar growth prospects.

Perhaps most important, though, owning this basket of stocks means you don't have to constantly worry whether one of them is suddenly going to fall out of favor and do serious damage to your portfolio's value.

What's your real motivation?

It's not as sexy a choice as taking a swing on Nvidia. And it's certainly not as scintillating as the idea of being able to say you bought stock right at the bottom of its 50% drubbing.

You don't invest for ego or entertainment, though. You invest to make money by maximizing your gains while minimizing your risk. An index always does that job better than an individual stock does, especially if your portfolio is chock-full of stocks that are all too aggressive, and too closely related.