I have a friend who makes questionable decisions with his money. He's played hours of online poker while barely paying attention. He buys into the high-dollar fantasy football league, then forgets to bench his injured players. And he buys shares in companies that are as likely to go to zero as they are to double.

I would try to talk some sense into him about these questionable decisions, but (1) he's a thrill junkie, (2) he's making his sketchy investments with fun money, not funds earmarked for his kids' education, and (3) my friend is, of course, me.

You saw it coming ...
I'm more likely to plunk down money on a wild card like LeCroy (NASDAQ:LCRY), a one-star CAPS stock that develops, manufactures, sells, and licenses oscilloscopes and global communications protocol analyzers -- and no, I have no idea what that means, but it sure sounds cool -- than on a slow and steady climber like Johnson & Johnson (NYSE:JNJ). Because while J&J will steadily make money for decades, it ain't gonna triple this year.

I even invested in Fuel Cell (NASDAQ:FCEL) because the company's futuristic, fossil-fuel-saving technology seemed world-changing. Never mind its complete lack of a business plan.

So why are you listening to me?
Returns on those investments notwithstanding, I'm not an idiot. I'm not laying my paycheck on the line just because I need a thrill and I'm too scared to bungee jump. In fact, my portfolio is healthy ... thanks to mutual funds.

There's room in every portfolio for small caps and highfliers, not to mention predictable performers like J&J. But regardless of your investment leanings, carefully selected mutual funds serve as a sound hedge to individual equities.

As with other investors like me, I can stand -- albeit uncomfortably -- to watch my investment in the latest rule-breaking technology company plummet because I have the bulk of my assets in championship-caliber funds.

A fund like ...
T. Rowe Price New America Growth (PRWAX) has plenty of upside, but the October recommendation in Champion Funds also boasts a low expense ratio (just 0.89%), a talented manager, and a focus on large-cap growth stocks that will lead to positive returns for decades ... freeing me up to take risks with that fun money. The fund's top holdings (as of October) include Adobe Systems (NASDAQ:ADBE), Microsoft (NASDAQ:MSFT), Cisco Systems (NASDAQ:CSCO), and eBay (NASDAQ:EBAY) -- companies that have probably seen their headiest days come and go, but that should continue to outperform individually and, almost certainly, collectively.

And even if eBay's CEO Meg Whitman leaves to spend her life collecting TeleTubbies figurines (unlikely, sure, but stick with me), and the stock plummets, New America Growth's roster of 98 stocks will insulate it from significant losses. That's the magic of mutual funds.

What diversification can do for you
Even though there's a world of underperforming funds out there, carefully selected winners can provide both downside protection and upside potential. Recommendations in Champion Funds have returned 31%, while their benchmarks have returned 17% over the same time frame.

So buy shares in a company that's developing flying cars. It could turn into the best investment of your life. But in the event that they never get off the ground, you'll be covered if you're properly invested in a diversified collection of low-cost, winning mutual funds.

You can view the entire lineup of Champion Funds recommendations, as well as our model portfolios, with a free 30-day guest pass. Claim it by clicking here.

Roger Friedman is the managing editor of The Motley Fool newsletters. He would like a flying car but isn't counting on it. He actually owns shares of Fuel Cell. Johnson & Johnson is an Income Investor recommendation. Microsoft is an Inside Value pick. eBay is a Stock Advisor selection. We tell you this because of the Fool's disclosure policy.