Dear Dr. Don: I inherited some money about 18 months ago and invested it in what I thought were "can't lose" mutual funds on the advice of a broker/mutual fund wholesaler friend. I also have some Home Depot (HD) - Get Report shares I have held a bit longer; they were my first investment. I am now down close to $9,000 from my original $51,000 investment, and I have no other investments or savings except for a small pension plan at work ($13,000 or so) and a small 401(k) ($4,000) that my husband has at Home Depot. We are both age 50 and scared to death about the Internet and tech funds we own. I intended to use this money for retirement (it is not in any IRAs); we can't afford to add any more money to these investments at this time. Given that I should NEVER have invested in anything as risky as the Munder Funds, what can I do now to remedy my situation so I can sleep at night? Buying by word-of-mouth was the worst thing I could have done, but the market was very good then and I had stars in my eyes. I realize that we have 15 years to retirement, so do we sit tight with what we have or do we cut our losses? Thanks for your help. I know I'm not alone out there! L.C.

L.C.,

You definitely aren't alone out there, but holders of the

(MNNAX) - Get Report

Munder NetNet fund are getting a little lonely. Losses and redemptions have reduced the fund's size from $11 billion in assets when it was closed to new investors in April 2000 to about $835 million currently. The fund reopened to new investors May 23, 2001.

If you're losing sleep because of your portfolio, it's definitely time to review and rebalance the portfolio. You need to get comfortable with how your money is invested. Over the past 12 months, an investment in the

S&P 500

lost about 12%. Your taxable portfolio lost about 24%. As you stated in your letter, you've lost almost $9,000 in these investments.

You've learned some valuable lessons from investing the inheritance. You learned that there's no such thing as a can't-lose stock mutual fund. You learned not to buy an investment just on the basis of someone's recommendation. And you learned not to lump a lot of your investments in one industry sector.

Here are a few more lessons. Avoid mutual funds with sales loads unless you have decided with your financial adviser that sales loads are how you want to compensate the adviser for his services. Also, take a holistic approach to your investments. Don't look at just how the taxable account is invested; look at how the 401(k) plan is invested and your other investments. For example, you didn't say if your husband's 401(k) is invested solely in Home Depot stock, but if it is, then you don't need to invest in Home Depot in your taxable portfolio. Finally, keep an eye on your mutual funds' annual expense ratios.

Of your five mutual funds, three have annual expense ratios of more than 1.25%, while two have annual expense ratios of less than 0.40%. The difference in annual expense ratios is justified in part by the type of funds you own. Specialty funds and funds that deal in smaller capitalization stocks tend to have higher expense ratios than index funds like the

(VFINX) - Get Report

Vanguard Index 500 and larger sector funds like

(VGHCX) - Get Report

Vanguard Health Care, which has $17.4 billion in assets.

None of your mutual funds has annual expenses higher than the average expense ratio for its fund category. If you didn't complain about the annual expense ratios in a good year, then you shouldn't complain about them when the fund is having a bad year. So, I'm not telling you to change funds based on the annual expense ratio; I'm just saying that you need to be aware of this expense.

People don't like to recognize losses in their portfolio. What they tend to do instead is hold on to the fund, waiting for it to make a comeback. What you have to do is look at the fund and how it's invested, and decide if you think these investments are going to turn around. This strategy is a little dicey in a taxable account because a mutual fund manager can decide on his own to shake things up and the gains (or losses) will be passed through to you.

The Munder NetNet fund is a curious beast in this regard.

Morningstar

rates the fund as being very tax efficient over the past three years, with a tax efficiency ratio of 97.96%. In contrast, the Vanguard 500 Index has a tax efficiency ratio of 90.99% for the same three-year period.

According to Morningstar, the Munder NetNet fund has a potential capital loss exposure of 52%, while the Vanguard 500 Index has a potential capital gains exposure of 38%. My point is that the fund manager can decide to turn over the portfolio and you'll end up recognizing the losses that you were trying to avoid taking.

Most readers don't provide me with the tax cost of their investments. You did, so it's clear in the table below that the only position in which you have a long-term gain is Home Depot. I'd recommend selling the two Munder funds and reinvesting that money. Even if you don't have any offsetting gains, you'll be able to use $3,000 of that loss in the current tax year against your income, and you can carry forward the balance to use in 2002 (consult with your tax adviser on calculating the tax costs for your investments).

I'd also recommend that you trim back your holdings in the Vanguard Health Care fund. Health care is an important sector and this is a good fund, but I'm uncomfortable with close to 25% of your portfolio being invested in this one sector fund. Lower it instead to 15% to 20% of the portfolio.

Overall, your portfolio has a 15% position in a broad-based index fund, a 12.7% position in cash and then five sector plays. If the cash position is your cushion for financial emergencies, then leave it alone. If you've got a cash cushion stashed away somewhere else, then you should put this money back into the market. You could increase the Vanguard 500 Index up to 20% to 30% of your taxable portfolio and consider investing 8% to 12% of your portfolio in a foreign stock fund. Energy stocks and financial stocks would be two other sectors to invest in.

You said in your letter that you couldn't afford to add to your account at this time. I respect that but suggest that you need to establish a household budget that includes your future financial goals. Know what level of income you can expect from Social Security and your pensions, and start investing to meet the shortfall between that expected income and what you will need to meet your expenses in retirement.

To the extent that you or your husband can contribute to tax-deferred retirement plans at work or IRA or Roth IRA accounts on your own, you should pursue those investment options -- especially if one or both of your employers match all or part of your contributions. Then you'd be better off spending money in your taxable account to replace salary you're now contributing toward the retirement plan.

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.