Last year, mutual funds had their first down year since 1994 and registered their worst performance since 1974. No wonder so many investors are questioning their basic strategy.

I've been reexamining my own beliefs, trying to isolate a few market basics that are always true, no matter what is happening in our economy or the world. I've come up with five rock-bottom truths.....

1. It's hard to predict which way the market will go. Over the past 120 years, the stock market has done well in years ending in five. Does that mean that you should predict a good year in 2005? I don't believe so, because it seems to be coincidence.

On the other hand,the first year of a presidential cycle is traditionally a bad year for the stock market. Are we seeing that now?

All those TV prognosticators speaking optimistically about a market comeback in the second half of this year can't predict the future any more than you can.

The goal is to invest sensibly even though you can't know which way the market is headed.

2. The stock market is reasonably efficient. There used to be any number of theories about how investors could make millions by finding undiscovered bargains. That's a lot harder to do today, with so many sophisticated computer programs sorting through the data.

For most of us, the best way to profit from market efficiency is to invest in total market index funds.

3. Diversification is critical. The wisdom of this old saw was driven home to many investors who went too heavily into tech and Internet stocks last year.

Throughout the 1990s, big-cap growth stocks were the clear winners. Now, value stocks are getting more attention. Small-cap value is doing particularly well. Investors who neglected fixed income last year lived to regret it, as bonds handily outperformed stocks.

Lesson: Don't overinvest in any one sector of the market.

4. It's vital to keep transaction costs low. There's no need for investors to pay sales loads when buying mutual funds. Also - it's important to pay close attention to funds' annual fees.

Studies have shown dramatic differences in long-term returns between high- and low-cost funds. This is a strong argument for low-cost index funds. These are tax efficient, too, because they have relatively low turnover - so you don't get big unexpected capital gains.

5. Take full advantage of compounding. Time is essential here - the longer you hold an investment, the more your money grows. To get the full benefit of compounding, you must also reinvest dividends.