Unless you were very smart or very lucky this year, it's likely there's a dog or two in your fund portfolio. So as year-end approaches, you may be wondering: Should you play it loyal in the hopes that your lame investments will snap back, or is it better to just dump your losers?

"Just about every manager I can think of has had poor spells," says

Morningstar

analyst Scott Cooley.

And in this choppy year, a lot of people are having poor spells. But before you shed that growth fund because it's off 15% this year after last year's triple-digit return, it's worth remembering that many highly regarded funds have spent the odd year in the dumps -- especially when the broader market is delivering a tough blow to that fund's investment mandate.

The key question to ask is why a fund is underperforming: It may simply be that its investment focus, such as, say, tech or Asia, is currently out of favor. To get a better sense of a fund's performance, compare it to its peers rather than the overall market.

On the other hand, underperformance could reflect more serious fundamental problems. Maybe a star stock picker has recently departed for another firm. Or it could be that the fund suffers from style drift: If your value fund gets unduly pummeled during a tech meltdown, relative to its peers, maybe it strayed too far from its investment mandate.

Another problem could arise if a fund's assets have ballooned. Say your once-nimble small-cap growth has sucked in billions in assets. It may still post decent returns, but it probably won't be investing in the same kind of stocks as before, and therefore won't fill the same diversification niche in your portfolio.

There are plenty of legitimate reasons to get rid of a fund. And it's sensible to make that assessment with an eye to year-end tax planning, since a well-planned strategy can help you reduce your tax bill.

Just don't be too hasty. Cooley thinks one year is too short a performance period for deciding to ditch a stock. After two years of weak performance -- especially two years with very different market climates -- dumping a loser starts to seem a lot more reasonable.

In 1997, after Robert Stansky's first full year at the helm of

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Fidelity Magellan, the fund ranked in the 64th percentile for annual performance. But in the next two years he finished ahead of the

S&P 500

. "If a guy like that can have a bad year, anyone can," concludes Cooley.

"If you were to jump at the end of one year's performance, you'd jump too soon," agrees Philip Cook, a certified financial planner in Torrance, Calif. He says one bad year may only mean that a fund's style is out of favor.

Consider investors in a sector like utilities, who've been well rewarded for resisting the siren song of tech. Last year, holders of

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Evergreen Utility, up a very respectable 33.4% at the time, must have been more than a little tempted to switch their money into a powerhouse like

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Janus Global Technology, up 211.6%. Fast forward: This year, Evergreen Utility is in positive territory, with a year-to-date return of 5.9%, while Janus Global Tech has dropped 8.6%.

Granted, some funds take a mediocre turn that persists. Cook doesn't regret dumping shares of

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FPA Paramount. At the time he bought the fund, in early 1997, it had a stellar 15-year record of outperforming the S&P. But the fund manager, William Sams, got so spooked by high price-to-earnings multiples that he started nervously funneling money into cash and gold.

For two years, Cook sat around drumming his fingers; when it became clear that Sams wasn't getting any more optimistic, Cook gave up and sold out in mid-99. (In March 2000, FPA Paramount got a new manager). "You respect sticking to your guns," says Cook. "But I'm not interested in fund managers that are stubborn. I'm interested in fund managers that are perceptive."

It's a harder call with focused funds. They can have a pretty upside -- sector bets on financials and energy have outperformed this year -- but their restricted mandate makes them vulnerable to great volatility. Take Fidelity's Latin America Fund,

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Fidelity Latin, and

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Fidelity Emerging Markets. "They're both very similar. They'll have one phenomenal year -- they'll be up 70% or 80% -- then seven or eight years where they're flat to down," complains Cook. When you average out the return, you end up with a modest 6% or 7% return.

For that reason, Cook steers clear of sector funds. These super-focused funds may be best left to true believers, who display the requisite stoicism in bad times, or as a small part -- say 5% to 10% -- of your diversified portfolio. As Cooley notes, "Most of us aren't good enough to know where the market's headed in the short term. If you really believe in an area for the long haul, you might have to be a little more patient." Thus, believers in biotech, a sector that has had a tough row to hoe for much of the late-1990s, have reaped sweet rewards as the sector's gained 46.76% year to date, according to

Lipper

.

But say you do decide to sell off a lackluster fund. There may be a silver lining, taxwise: If the fund has lost value since the time you bought it, you can use it to offset capital gains from any other funds you might want to cash in on.

However, if the fund's net asset value has appreciated since you bought it, you'll have to pay taxes on the capital gains. To offset gains, you might want to temporarily dump another fund in your portfolio that has a capital loss. You have to wait thirty days before buying back into the fund; in the meantime, you can park your money in a similar fund in the same family. For more on tax strategies, check out Tracy Byrnes' recent

Tax Forum.