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Markets

Yes, You Are Allowed a Do-Over

If you hate your investments, dump 'em all and try a new plan.

OUR READER
WHO: Clinton Wu, 25
WHAT: Commercial real estate broker
WHERE: New York City
SYMPTOM: Frustrated by losses, he is ready to dump everything and start from scratch.

Clinton, a Princeton grad who moved to Manhattan three years ago, says he's lost $30,000 of the $110,000 he invested in about 50 stocks and funds. He's thinking of unloading them all and rolling the bulk of the proceeds into a diversified array of stock-owning exchange-traded funds, with most of the rest going into bond and real estate funds.

Clinton plans to stop trading stocks and funds in response to tips from friends and what he sees on Web sites and TV. "I've paid the price for nibbling every time I'd think about a stock," he says. "It's time to get on a simple track."

Surprisingly, some investment advisers are okay with the idea of a client selling everything at once -- as long as you know what you'll do next. Says Tom Taylor, of Thoma Capital Management, in Towson, Md.: "Dropping the old portfolio in the fireplace or burying it in the backyard is psychologically healing. Assuming doomsday is not around the corner, the stock market will stabilize and head higher. It always has." In addition, Clinton can use losses in his taxable accounts to offset any capital gains -- and possibly to offset other income as well.

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Clinton's big question is when to put the money back into the market. He's not sure whether it's wiser to restructure all at once or gradually. In normal markets, the slow approach would be prudent. But in today's hyperactive market, such a strategy may not work. If you're waiting for the market to calm down before you reinvest, you may have a long wait -- and miss out on the opportunity to scoop up stocks at what appear to be unreasonably cheap prices.

Taylor says the first thing an investor planning a full makeover should do is establish where to reinvest, whether in index funds, ETFs, bonds, whatever. Next, determine your priorities, such as aggressive growth, income or safety. Then just do it -- execute the plan.

You also want to move all at once when you're upgrading from lousy funds to better ones, says Carl Camp, of Eclectic Associates, in Fullerton, Cal. "It is always appropriate to take a disorganized mess and make changes," Camp says.

But before you dump all of your investments, consider a couple of points: First, if you cash out from a fund that is closed to new investors, you won't be able to return unless the fund subsequently reopens.

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Second, if you're willing to retain a few individual stocks despite all the losses and frustration they've engendered, consider holding on to those that still hold long-term promise. For example, among his pile of lousy stocks, Clinton holds shares of Apple and Google. He paid $15,000 for them, and they're worth only $10,000 now. But both of these cash-rich companies are growing at rates that are well above average, and their stocks should do well in a decent stock market. So sift through your trash carefully before you take it all to the incinerator.

Stumped by your investments? Write to us at portfoliodoc@kiplinger.com.