The markets have given investors little to be thankful for, but that means it's even more important than ever to go over your portfolio before the year winds to a close.

"It's been an unusual market," says Glen Clemans, a financial planner in Portland, Ore. "As a result, it requires more thought and work from investors than is typical."

Don't be skittish about that added work, though -- the principles are the same. Every year, investors should make sure their portfolio allocation reflects their financial goals. And generally the best time to evaluate your investments is in the fall, while there's time to prepare for the tax implications of any investing decisions.

"The big focus should be on cleaning up your portfolio and taking losses," says Kaycee Krysty, a financial planner with Tyee Asset Strategies in Seattle. "This is the perfect time to make sure the funds you have are the funds you want."

Indeed, far too many people have ignored the imbalances in their portfolio -- which meant too many growth funds in the late 1990s, and now likely too much in value or bond funds.

Since most investors chase returns -- pouring money into sections of the market that are doing well -- their portfolios end up reflecting exactly what they shouldn't.

"When I rebalance my clients' portfolios, I take money out of areas that have outperformed and put it into areas that have underperformed," Clemans says. "Most people do the opposite -- and that's exactly the wrong thing to do."

A quick look at your year-end statements should alert you to any need to rebalance. As you go over them, consider what your portfolio is for -- most importantly, when you'll need the money and how crucial it is you'll need it at that time. Any money you'll need in less than five years (including your emergency stash of six months' worth of living expenses) should be in a money market fund or a conservative bond fund. The farther off your need for the money is, the more you can put in equities.

If you're saving for a retirement that's 20 years away, plowing more money into bonds simply because they're doing well now won't help you in the long run. Indeed, it very well may hurt you, since it likely means you'll miss the eventual run-up in equities, buying into stock funds too late.

If a quick look at your statements seems impossible, chances are you have too many funds and too many accounts. If you've moved around a lot in your career, you may still have retirement funds in various company plans -- consider consolidating them into a "rollover" IRA to make your planning easier. Rollover IRAs can be opened at any fund company or brokerage.

Far worse than having too many accounts, though, is having too many funds. Most people -- regardless of how wealthy -- don't need more than eight funds, Krysty says, and that's assuming they have multiple accounts. Investors generally need no more than a good, low-cost intermediate-term bond fund, and a few stock funds to reflect domestic and international, small- and large-cap stocks. In fact, many investors need far less; very often, a broad-market equity index fund and a bond fund will more than suffice.

And this year's poor performance in the equities market provides ample opportunity to clean house. Generally, to minimize any tax owed, investors should try to sell a fund before it makes its annual capital-gains distribution. But since most equity funds won't pay out capital gains this year, there's no need to worry about timing your sale.

Also, if you've held on to any funds (growth funds in particular) simply because you didn't want to pay tax on the gains, well, those gains are gone now. Dump any extraneous funds.

A Surprise for Bond Fund Investors

While equity funds won't likely make capital gains distributions, many bond funds will -- a fact that will surprise many investors, Clemans warns.

Capital gains distributions from bond funds were nearly unheard of, even just a few years ago, but will grow dramatically this year, as the bond market has boomed.

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PIMCO's

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TotalReturn fund, the largest actively managed mutual fund, didn't make

any

capital gains distribution in 1999 or in 2000. In 2001, though, it jumped to 2.75%. This year, though, it will make a capital gains distribution of 3.14%.

Similarly, PIMCO's

(PRTNX) - Get Report

RealReturn fund paid 0.02% in capital gains in 1999; 0.08% in 2000; and 0.09% in 2001. This year, the fund will have a 1.27% capital-gains distribution.

While these figures aren't nearly as high as what investors came to expect from equity funds in the late 1990s, it's still money you'll owe tax on, if you don't plan accordingly before the end of the year.

If your portfolio now has more than you need in bond funds, thanks to the run-up in the market, sell some shares. If you're also dumping losers or funds that simply aren't needed in your portfolio, you can use those losses to offset the gains in your bond funds. (For more on the tax implications of selling funds, see

"Tax Time: It's Not Too Early to Look for Ways to Save Money".

"In the late 1990s, I kept trying to convince my clients that the bull market wasn't going to go on forever," Clemans says. "Now I'm trying to convince them that this bear market won't go on forever, either."

Now

that's

something to be thankful for.