(MONEY Magazine) – What a difference a few weeks make. as june began, stock fund investors were merrily cruising along the highway of high returns, elated by their 12.7% average gain for '96. But then the road got bumpy. By Aug. 1, the average U.S. stock fund's year-to-date advance had dropped to just 4%.

What's more, MONEY's chief investment strategist Michael Sivy still sees the potential for a further 10% or greater stock market decline (see page 58). So you may be thinking you need a whole new investment philosophy to cope with the uncertainties of coming months. Well, yes, this is an ideal time to examine your fund portfolio--and your basic assumptions of fund investing. But chances are you don't need to do anything rash. I'm going to suggest some simple, sensible steps to increase the reliability of your returns.

First, a quick look back at the recent bloodletting, Many of the most popular (and aggressive) funds of early 1996 took the worst dives in the dog days of summer--for instance, Dreyfus Premier Strategic Growth, which had risen 38.5% in the first five months, then fell 28.9% by the end of July; Oberweis Emerging Growth, a 33.8% gainer through May, took a 23.7% pounding over the next two months.

Say you bought $5,000 worth of shares in the Dreyfus Premier fund on Jan. 1; by June 1 your investment was worth $6,925. But then that amount shrank by nearly a third, or $2,001, and you only had $4,924 left by Aug. 1. After making 38%, then losing "only" 29%, you were $76 in the red. The uneven law of percentages shows no mercy to fund investors: A smaller loss can wipe out a big gain.

No wonder there's been a lot of talk lately about "bear proofing" your portfolio with funds that do well when the market falls. Sure, some funds have shown they can outperform during difficult times--Lindner Growth (no sales load; up an annual average of 11.11% for the three years to Aug. 1; 800-995-7777) is one of the best. But they invariably fall behind when the markets recover. What's more, the whole reason to invest is because you think the market will go up over the long haul, not down.

What about searching for a fund that excels in both bull and bear markets? I've spent years studying the performance history of hundreds of funds, and I can tell you firmly: There ain't no such animal. Why not? When stocks are rising, the funds that do the best are those that take the most risk (mainly by investing in small, low-dividend stocks trading at high prices in relation to their earnings). But when stocks are falling, the opposite is true: The funds that take the least risk earn the greatest returns. (In the Fund Screen on page 41, we highlight 11 funds that have both outgained the S&P 500 in recent years and lost less than the index in the June-July dip; but this year's downturn has been too brief and shallow to qualify as a bear market.)

Still, I can suggest two prudent moves that will help you survive whatever the market has in store. One: Diversify among different types of funds. Two: Within each category, choose middle-of-the-road funds and stay out of the fast lane.

Diversification, or spreading your bets across different kinds of investments, is a time-honored way to reduce your risks and raise your returns. The principle is simple: Different investments don't usually all move in the same direction at once, so you are less likely to suffer a catastrophic overall loss. One smart way to diversify is to put 10% to 35% of your portfolio in global or international stock funds--especially those that buy undervalued stocks. Two reliable choices: Preferred International (no load; up 13.1%; 800-662-4769) and Tweedy Browne Global Value (no load; up 12.6%; 800-432-4789).

The second move: Stop trying to find the next fund that will get you rich quick. Instead, find funds that produce steady gains and avoid big losses.

To see what I mean, look at Investment Co. of America (5.75% load; up 13.3%; 800-421-0180), the $25.7 billion flagship of the American Funds group. Over the past 15 years, ICA placed among the top quarter of growth and income funds in only six years--but never finished among the bottom quarter in any year. Most of the time, its moderate returns put it smack in the middle of its peers. Boring? No way. Over the total sweep of the past decade and a half, this fund has beaten 88% of all its rivals.

So if, like me, you invest for the long run, skip both the bull market stars and the bear market champs. Instead, stick with funds that chug out decent returns year after year. Some sound choices: Davis New York Venture A (4.75% load; up 15.1%; 800-279-0279), Dodge & Cox Stock (no load; up 15.6%; 800-621-3979), Fidelity Growth & Income (no load; up 15.6%; 800-544-8888), Janus (no load; up 12.7%; 800-525-8983), Neuberger & Berman Guardian (no load; up 12.4%; 800-877-9700)--and that paragon of predictability, Vanguard Index 500 (no load; up 15.5%; 800-851-4999). Whether the market goes up or down, staying in the middle of the road will give you the smoothest ride to your goals.