But first, a little deprogramming may be necessary for those who frequent the magazine stands. There are no "Best Funds to Buy Now." There is no one-size-fits-all "Fund Portfolio for the New Millennium." Indeed, the hottest funds of today are frequently the coldest funds of tomorrow. Buy them at your economic peril.

"There is more risk of loss when you buy a fund that's at the top of the performance charts than there is when you buy a fund at the bottom," says A. Michael Lipper, chairman of Lipper Inc., a mutual fund information and ranking service based in New York.

So how do you build a winning fund portfolio? It's remarkably easy if you remember a few key facts.

First, if funds will make up the bulk of your investment portfolio, you should diversify among different types of investment classes--big company stocks, small company stocks, international investments, bonds and cash. That means you'll probably want to buy at least five different funds, says Judith Martindale, a fee-only certified financial planner based in San Luis Obispo.

In fund-speak, big-company stocks are sometimes categorized as "growth" or "growth and income" funds; small company stocks are sometimes labeled "aggressive growth;" bond funds are usually listed under "income." Thankfully, money market and international funds are predictably labeled.

However, "global" or "world" funds differ from "international" or "foreign" funds in that the former two categories can invest domestically, as well as in foreign markets. The latter are restricted to overseas investments.

You should diversify among all these categories for two reasons, Martindale says. The first is that a good investment portfolio addresses the purpose of your savings--the specific goals you aim to finance. Some of your goals will probably be short-term, some long-term, some pivotal, some discretionary. To appropriately address an important short-term goal, you need a short-term investment, such as a money market fund, which is not going to put your principal in jeopardy. To address long-term goals, you're better served with stocks, which swing in value but are more likely to handily outpace inflation over time, based on historical averages.

How much money you ought to put in each type of fund is a personal decision that should hinge on your goals and how much time you have to meet them.

The second reason for diversification is stability. Each type of asset tends to appreciate--or depreciate--at different rates and different times. By investing some money in each, you smooth out the sharp swings in your investment portfolio.

When it comes to choosing specific funds in each category, you have two choices: You can go with so-called index funds, or you can opt for actively managed funds.

Actively managed funds are those in which a portfolio manager aims to beat the overall market's performance by carefully choosing specific investments that the manager believes are primed to excel. The fund manager will then actively trade these stocks in an effort to get a better-than-average return.

Index funds, on the other hand, simply aim to mirror the market. They do that by buying stocks or bonds that represent the specific investments in a particular market index.

For instance, an S&P 500 index fund will own the stocks that make up the Standard & Poor's 500-company stock index. An index fund that aims to mirror the Dow Jones industrial average will buy stock in the 30 companies that make up that index. The index fund simply holds onto those investments, never trading shares unless the index components change. (Every once in a while, a company that's part of the Dow 30, for example, will get bought out or will go out of business. At that point, another company will be chosen to represent the company that fell out of the index.)

Which is the best way to go?

Martindale favors the index approach. Because index funds don't actively trade shares, they generate fewer taxable capital gains. (The gains and losses realized from active trading in a mutual fund are passed on to investors at year-end. If the fund manager has sold stocks at a profit, all the investors in the fund must report--and pay income taxes on--the gains.) Of course, paying less tax as you go along leaves you with more money to invest.

More important, while there are always some actively managed funds that handily beat the market at any given time, few beat the averages over long periods. If you are a long-term investor, your odds are better with the index fund, Martindale says.

In addition, because there is very little "management" needed to buy and hold stocks that make up an index, annual management fees charged to investors in index funds are low. Whereas the average actively managed stock fund may charge 1.5% of the account value in management fees each year, many index funds charge between 0.2% and 0.5%. The bottom line: More of the investment return is returned to the investor. That, too, has a beneficial effect on the value of your portfolio over time.

Why would anyone buy actively managed funds, then? For the same reason that they buy lottery tickets and individual stocks. Hope springs eternal. There are a few cases in which a fund manager does consistently beat the market. If you happen to be among the fortunate few investors in these market-beating funds, a relatively modest investment can make you a rich retiree. And you may feel--as do many investors who buy individual stocks--that you know more about what will make a fund (or company) successful than do other investors or the market as a whole.

Deflating Inflation

Through most of the century, the stock market has proved to be the surest way of staying well ahead of inflation. Most stock mutual funds have underperformed the broad market, as measured by the Standard & Poor's 500 index, but investors can get returns close to that benchmark by buying mutual funds linked to it. This chart tracks the growth of $1 from 1925 to the present day in various investments compared with inflation.

The Growth of $1: 1925-1999

S&P 500: $2,350.89

Long-Term Treasuries: $44.18

30-day Treasury bills: $14.94

Inflation: $9.14*

Source: Ibbotson Associates

*Because of inflation, $9.14 has the same buying power as $1 in 1925.

---------- END TABLE -->