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Nine straight weeks of equity fund outflows -- are you sure you know what you're doing?

Granted, a lot of you own -- or have owned -- some real dogs. Anyone with a surplus of growth funds, technology funds or just plain too many funds certainly had good reason to sell in recent months. But the oft-overlooked corollary to the bull market genius is the bull market risk tolerance.

In the 1990s, far too many people blissfully saw retirement as so far off that the higher-risk/higher-reward profile of an all-equity portfolio was what they wanted. Too few realized the amount of risk they were taking on; some even failed to realize that "risk" means that stocks can go down as well as up, sometimes for long stretches of time.

For most people, though, equities are still the best bet for the long haul. But as you look over your second-quarter mutual fund statements, consider your asset allocation in terms of when you'll need your money and how much risk you can stomach until that time arrives. And if that means, say, dumping a few equity funds and moving more into bond funds, by all means do so.

After all, the criteria for

keeping

a fund should be as stringent as the criteria for

choosing

a fund. That sometimes means holding on to investments (like U.S. equities) that are painful in the short term. After all, a diversified portfolio means that some allocations will do well

while others do not

. The reason diversification works is that it essentially operates against human nature -- rebalancing a sound plan keeps you invested (even buying more) in an asset class that's not doing so well, and forces you to sell and reap gains from the classes that are outperforming. It also limits the urge to time the market, a game that fund investors always lose in the long run. "All of our studies have shown that individual investors are the worst market timers around," says Scott Cooley, a senior analyst at Morningstar.

But asset allocation issues aside, evaluating your holdings can sometimes be an emotional issue; investors often dump funds in anger or hold them out of stubbornness or nostalgia. Rather than reacting emotionally or succumbing to inertia, consider the following reasons to dump a fund:

Underperformance -- Everything's Relative

This is where many selling decisions go horribly wrong. Some areas of the market that you

want

to be invested in -- like domestic equities -- will inevitably not do so well. So just because your large-cap growth fund lost 26% in the past year doesn't mean you should dump it, no matter how dismal those results seem. Always compare your fund with the category's average, as well as with its relevant benchmark. Large growth funds averaged a 28.67% loss in the past 12 months, according to Morningstar, while the

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Even if your fund dips below the average, consider keeping it if it represents a sliver of a category that operates somewhat on the fringes. "I don't think the deep-value guys at Oakmark or Kemper Dreman were stupid in the late 1990s," Cooley says, "even though their funds were pretty lousy those years."

A fund that consistently underperforms over three years, though, warrants a hard look. A fund that consistently falls in the bottom quartile of its category over three years can be dumped almost immediately.

Style Drift

Clearly, once you've taken the time to assess your own proper portfolio allocation, you don't want a fund manager mucking it up by investing in areas you haven't charged him with. Just like you shouldn't chase returns, your fund manager shouldn't either.

But a "technical" style drift that's in keeping with the fund's objectives may not be so bad. Value manager Bill Nygren of the

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Oakmark I fund, for instance, has begun buying pharmaceutical and other stocks that have traditionally fallen into the growth category. Nygren argues, though, that now that the sector's been crushed, that's where to find high-quality companies at attractive valuations. And no one can argue that he's chasing performance, given that pharmaceutical stocks are down 36% year to date.

So don't be bothered by technicalities -- a slight style drift that's in keeping with the same strategy isn't anything to worry about. A manager loading up on stocks outside his traditional base may not be making the best choices and may be relying on short-term momentum to goose his base.

Swelling Assets

Sorry, gentlemen, but sometimes size

does

matter. When a fund's assets swell, it often becomes unwieldy for the manager to deploy new money. Particularly in somewhat illiquid areas of the market -- like international stocks -- a large fund moving in or out of a position can dramatically affect the share price. That can be bad news for investors.

Swelling assets in small stocks can also be problematic, particularly in the growth category. "Increased assets had the biggest impact on small- and mid-cap growth and blend funds," Cooley says of a Morningstar study. Indeed, as investors chased returns into the small-cap arena last year, the money that poured in made nimble stock-picking difficult. Fund managers were often forced to either hold more stocks than before (sometimes causing style drift) or larger stakes in individual companies (which can cause liquidity problems). If you're in a fund that's seen a big short-term run-up, it may be time to take some profits and make sure it's really a long-term hold.

Manager Defections

There's no need to panic if your fund manager leaves the fund. Actively managed funds (with certain notable exceptions) rarely beat the market over the long haul, and there are those who argue that the ones that do are simply benefiting from statistical norms. (A certain number of funds are statistically bound to outperform the benchmark, but those aren't necessarily the same funds every year.) Besides, there's no shortage of talented money managers out there, no matter what you think this market indicates, so go ahead and give the new guy (or gal) a chance. (Obviously, manager changes are moot as far as index funds are concerned.)

Having said all that, if, after a year or two, the new manager starts shifting into new asset classes, betting on companies of different sizes or taking a much more (or less) aggressive approach, consider whether or not the fund still meets your needs. If a value fund starts buying growth stocks to boost performance when growth starts doing well, for instance, your overall asset allocation will be thrown out of whack.

Expense Ratio Rises

Don't forget that you're paying these folks to manage your money -- and if charges rise significantly, you may want to consider selling your stake for a cheaper option. It's highly unlikely that a bond fund can increase its returns enough to justify an increase in the fund's expenses. And a "closet" index fund -- one that tracks an index closely yet charges for active management -- may not be worth the extra fees.

Have questions on personal finance issues? Beverly Goodman welcomes your questions and feedback and invites you to send them to Beverly.Goodman@thestreet.com

In keeping with TSC's editorial policy, Beverly Goodman doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Goodman welcomes your questions and comments, and invites you to send them to

Beverly Goodman.