In most bear markets, you can find somewhere to hide. But this time around, there's really no harbor from the financial storm.

No one knows that better than mutual fund investors. You may have thought that a diversified portfolio of mutual funds and ETFs covering a wide range of assets would protect you from declines -- or at least offset them somewhat. Yet because of the unprecedented confluence of factors that have driven down markets around the world, you may well see losses in nearly all of your funds.

Gimme shelter
Out of all the fund categories that Morningstar tracks, there are only two ways you could have invested to make money so far in 2008: either in government bonds or in bear-market funds. Everything else is down.

That includes stocks of all kinds, big and small, domestic and foreign. That's not a shock, given the turmoil in the markets around the world. But what is surprising is that more conservative investments are also down sharply. Conservative balanced funds are down more than 18%. Corporate bond funds have fallen between 4% and 22%, depending on maturity and credit quality. Even municipal bond funds are down, with some long-term muni fund categories falling double-digit percentages.

Falling short
And those are just averages. The bear market is challenging the ability of some extremely well-regarded fund managers to protect their shareholders' capital, and plenty of individual funds have done far worse than their respective categories. The famous Fidelity Magellan (FMAGX) has seen bets on stocks like AIG (NYSE:AIG), Nokia (NYSE:NOK), and Research In Motion (NASDAQ:RIMM) add up to nearly a 50% loss for the year. Dodge & Cox Stock (DODGX), meanwhile, has seen big losses in Sprint Nextel (NYSE:S) and Motorola (NYSE:MOT) contribute to a 44% drop so far in 2008.

When you own individual stocks, fear can cause you to make mistakes. But with mutual funds, you face two threats. One is that your fund managers may panic, making a huge mistake with your money. But even if your fund managers keep their cool, shareholder redemptions can also put your share value at risk. When mutual funds face a herd of selling shareholders -- as they have recently -- they have no choice but to sell off their holdings to raise the cash to pay them, no matter how low those holdings have fallen.

Tips for a healthy fund portfolio
So how can you protect yourself? Here are a few things to keep in mind about your fund portfolio:

  • Keep track of fund assets. Of course, as the stock market falls, the value of your fund's assets should drop as well. But if fund assets drop disproportionately, that's a sign of shareholders heading for the exits. That could force your managers to make bad decisions, jeopardizing your own shares.
  • Get diversified. U.S. stocks have actually performed better than many foreign markets, with emerging-market stocks like Petroleo Brasileiro (NYSE:PBR) and Vale (NYSE:RIO) taking especially large hits from the commodities bust. If you agree that going international is the right bet for long-term growth, you're getting a bargain now.
  • Spread out your fixed income. If you've never broadened your investments into corporate or municipal bonds, now's a great time to take a look. Sure, there's plenty of risk even with these conservative investments, as credit risks for both companies and municipalities are above normal levels. But higher yields compensate you well for that added risk.
  • Try out closed-end funds. In times of distress, closed-end funds have an advantage over their traditional counterparts: They don't have to worry about redemptions. Because sales happen in the open market, shares can trade at big discounts to a fund's intrinsic value -- and they are, especially in areas like junk bonds and other leveraged debt funds.
  • Other warning signs. Watch out for changes in fund managers. Even during ordinary times, a new manager can be a reason to sell -- but right now, you simply can't afford to have inexperienced managers at the helm.

Finally, just as we've been telling investors in individual stocks, don't panic. If you have a good investing plan, stick with it -- even through tough markets. In the long run, you should reap the rewards of your discipline.

For more tracking your investments through the bear market, read about:

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Fool contributor Dan Caplinger has seen his mutual funds take a beating. Petroleo Brasileiro is a Motley Fool Income Investor selection. Sprint Nextel and Nokia are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is a helping hand.