It's been a tough decade for stock funds

For some investors, the lost decade in stocks is more like the dead decade.

The average diversified U.S. stock fund gained just 13% from 1998 through 2008, according to Lipper, which tracks the funds. But more than a dozen of 1998's largest and most popular funds lost 30% or more.

Normally, one or two small funds post horrendous long-term records. Frontier MicroCap fefpx, for example, has fallen 98% in the past decade.

But it's unusual for large funds to post such big long-term losses. Mutual fund companies profit by collecting fees on a fund's assets, and it's tough to persuade investors to buy a fund with a lousy long-term record. Fund companies often go to great lengths to make sure that their funds rack up decent long-term records. What happened with these funds?

•A rotten market. The current bear market, as well as the 2000-02 bear market, are among the most savage since the Great Depression. The Standard & Poor's 500-stock index has fallen 13% the past decade, including reinvested dividends, so even good managers have struggled.

•Out-of-favor investment styles. Some of the funds with the worst long-term records are large-company growth funds. These funds look for stocks of companies with soaring earnings. It was a great approach in the 1990s, when large-cap growth trounced every other investment style. Starting in 2000, however, technology stocks and other growth segments have far underperformed the S&P 500. The technology-laden Nasdaq stock index has fallen 39% the past decade.

•Spotty management. Some fund companies had managers with great records who went through a bad patch.

For example, Fidelity Magellan fmagx, the largest stock fund at the end of 1998, was Fidelity's flagship fund for more than a decade, and the company typically puts some of its best managers at the helm. Robert Stansky, the fund's manager in 1998, had a stellar career at Fidelity Growth Company. And Harry Lange, the Magellan fund's current manager, is a star. Both had rocky performances at Magellan, however.

"Even great managers go through significant out-of-favor periods," says Kurt Brouwer, a San Francisco financial planner. Stock of Berkshire Hathaway brk.a, Warren Buffett's holding company, significantly underperformed the S&P 500 in 1998, Brouwer notes.

And at Legg Mason Value Prime lmvtx, manager Bill Miller beat the S&P 500 for more than a dozen years. The fund has lagged behind the index for the past three years, however, and posted a staggering 55% loss in 2008.

Should you bail on a fund with a poor long-term record, or hang in there? It depends. Fund companies typically evaluate managers on their three-year records. A large fund will usually dump a losing manager after three years, so it can pay to hang on.

But you shouldn't hang your financial fortune on one manager. Diversifying among several funds increases the odds that you'll have a hot fund to balance out your cold one.