Recession-resistant funds may scoop up lots of holdings

— -- Sometimes, the questions we don't ask are more important than the ones we do.

Had someone asked, for example, "Can he hit?" the Red Sox might never have traded pitcher Babe Ruth to the Yankees. Had someone asked, "Do we really need a New Coke?" we wouldn't still be making New Coke jokes.

One question every investor needs to ask is, "How much money can I lose?" It's a particularly urgent question in uncertain economic times — now, for example. So for the second column in our series on dealing with stormy financial markets, we're going to talk about how to make your portfolio as recession-proof as possible.

Let's start with the proposition that the more narrowly focused your portfolio, the larger the potential gains or losses. Suppose, for example, you had invested in the Hey, Boy & Howdy fund, which owned five stocks. If one of its stocks had been Google, then you would have made a great deal of money. But if one of those stocks had been Enron, then you'd be sitting on some big losses.

Highly concentrated funds, particularly those that focus on one sector, enjoy the biggest potential for outsize losses and gains. If you're worried about a downturn, you should look for funds with many holdings. You'll give up the chance for a 100% gain in one year, but you probably won't lose 70%, either.

One easy choice would be Vanguard Total Stock Market Index, which holds 3,685 stocks and tracks the MSCI US Broad Market Index. (Vanguard's rival, Fidelity, offers the Fidelity Spartan Total Market fund, which has 3,411 holdings and tracks the Dow Jones Wilshire 5000 index.)

These funds will protect you somewhat if one stock, or even one whole sector, takes a bruising. Keep in mind, though, that they're still stock funds and will follow the stock market faithfully — even if it walks off a cliff. If you want further protection, you have to invest in something that might not move in lockstep with the broad stock market.

You can use two statistical measures to determine how closely one type of fund tracks another. The first is a fund's statistical correlation with another fund or a broad index. A 100% correlation is a perfect match; a 0% correlation means the two funds' movements are unrelated. A negative correlation means the two move in opposite directions.