I am 30 years old, married with a year-old daughter. Our annual household income is approximately $135,000. I currently maximize my annual contributions to my 401(k) plan. We own our home and plan to purchase a large single-family home in the next three to four years. By then we should have about $50,000 in equity in our current home. We carry a very large student loan debt, $90,000, but have no credit card debt. In August, we came into some money and began investing through an online account. We put $55,000 into a portfolio of mutual funds, adding an additional $3,400 in September and October, putting our total investment at $58,400. We plan to continue investing between $750 and $1,000 each month into the account, as well as two lump-sum investments in the $5,000-$7,000 range twice a year when the firm distributes bonuses. Our goal is to maximize returns and use the money in the taxable account to make the down payment, pay closing costs, and furnish the new home in 2003 or 2004. We expect the new home to cost about $400,000. So far, since investing in August, the portfolio is down about 11%. I realize that I have a fairly aggressive, tech-heavy fund portfolio, with a number of overlapping stocks. I tried to choose funds that were highly rated by Morningstar, had been around for a number of years with the same manager or team, and were generally ahead of the curve on tax efficiency. I'm not sure what to do with the subsequent investment money. Should I start to buy individual stocks? Add to the mutual fund holdings? Add a new mutual fund to the portfolio? Thanks. Your recommendations would be greatly appreciated. TB My portfolio's current holdings are:

TB,

Like most of us, you're balancing several financial goals: housing, retirement and perhaps your child's college education. For now, you've dedicated the taxable account to the housing goal and the 401(k) account to the retirement goal. As a general rule, the closer the goal, the less risk you should take on. Your taxable portfolio breaks that rule, by investing heavily in the stock market for a goal that is only three to four years away.

The stock market's unparalleled returns over the past decade, with the

S&P 500 returning 19.43% on an annualized basis over the past 10 years, made a lot of investors feel foolish tying the maturity of their investments with their investment horizon. If the stock market was going to average 20% annual returns, then why invest in cash (i.e., money market funds) yielding less than 5%? Like betting heads because heads came up in the last coin toss, counting on this year's stock market to meet or beat last year's performance will eventually fail as an investment strategy. The year's not over yet, but it's looking like this will be the year that investors are forced to rethink their investment strategy and asset allocations.

So my first recommendation is that you move some of your taxable investments into cash or near-cash securities. Did you know that you can earn over 7 1/4% annual percentage yield on a two and a-half year CD? You can use Bankrate.com's

Best Rates feature to find the highest yields in the nation from financial institutions. If you think the

Fed's next move is to lower interest rates, then locking in now makes sense.

As you point out, your taxable portfolio is down about 11% since opening the account in August. The temptation is to hold on in the hope that a rising market will get you back to a profitable position. It's the behavioral aspect of investing. People don't like to recognize losses. But those losses can save you some money on your tax return and allow you the opportunity to reallocate your investments.

Tracy Byrnes

reported some great ideas in

How to Turn Market Pain Into Tax Gain, an article she wrote this spring after the April technology selloff.

You recognize that fund overlap might be a problem. Where it is most compelling is in the Oak Associate funds that you own --

(ROGSX) - Get Report

Red Oak,

(POGSX) - Get Report

Pin Oak and

(WOGSX) - Get Report

White Oak. All three funds are co-managed by James D. Oelschlager, with the Pin Oak and White Oak funds co-managed by Donna Barton. All three funds have are classified as large-cap growth funds by Morningstar, so it's not surprising that there's overlap even though they have different Morningstar fund categories -- Specialty Technology, Mid-Cap Growth and Large Growth.

You're not overweighted in any of these stocks, although your technology emphasis shows up in this grouping. Decide what you're trying to accomplish in the marketplace and adjust your investments accordingly. You state that your goal in the taxable portfolio is maximizing returns. As I said earlier, that's not really appropriate when investing for a short-term goal. As you've discovered, additional risk accompanies the higher expected returns. You don't have time for any rebuilding years with a short-term investment horizon. There's room for an aggressive outlook in your retirement portfolio. Use the 401(k) account to invest in growth funds to fund your retirement.

You expect to buy a $400,000 house three or four years from now. Three years from now, by your projections, you'll have invested another $57,000 to $84,000 in your taxable account. That, combined with your current account balance and your estimate of your home equity position will give you $159,000 to $180,000 to use as a down payment, pay closing costs and furnish your new home. That's before considering any investment returns on your taxable portfolio. Put a 4% after-tax return on the investments and you're at $170,000 to $190,000. I don't see where you need to swing for the fences to reach your investment goal.

There's nothing wrong with holding individual stocks. Just don't buy the same stocks that your funds are buying unless you are consciously trying to increase that exposure. I also want you to start thinking about funding your child's college education. The earlier you start contributing to that goal, the easier it will be to reach the goal. Check out your state's college savings plans at

CollegeSavings.org but don't limit your thinking to your state's plans.

Send In Your Portfolio

If you would like to submit your portfolio for a makeover, send it to portfoliorx@thestreet.com. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though publicly we'll use only your initials, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.