Thousands of mutual funds have performed terribly in this long bear market, yet many investors continue to hold on for dear life. But letting go of your losing funds and reaping the tax benefits is one way to turn your lemons into lemonade. By selling, you realize capital losses that reduce your capital-gains tax bill. If you don't have any gains, you can still write off $3,000 of losses against your income and carry the rest forward to nullify gains in future years. Even if you like a fund, you can buy it back 31 days after selling it; the Internal Revenue Service will allow the write-off. Taxes aren't the only reason to sell. "Poor performers are often likely to continue to lag their peers," says Mark Riepe, senior vice-president of the Schwab Center for Investment Research. According to a study Riepe conducted, investors who dump a fund after one year of lagging other funds with the same investment style outperform those who buy and hold the laggard for three years. The key is that you don't just sell and move to a money-market fund. You purge, say, your lousy large-cap growth fund and replace it with a better one. Of course, you need to factor in trading costs and sales charges before making this decision.
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