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For stock mutual fund owners, it's swap meet time; that time of year when it makes sense to consider swapping poorly performing funds for better ideas.

And given the long bear market, a portfolio cleaning this year could pay a bonus. Investors may be able to dump lousy funds for others with greater promise if the market recovers in 2003, while getting a break on taxes by turning paper losses into realized ones.

In a bull market, stock fund shareholders at this time of year normally would be sweating the annual November and December tradition of capital gains distributions, when funds are required to pay out their realized gains. But this year, taxable gains payouts should be rare, given the market's dive for most of this year.

That gives investors freer rein to consider upgrading their portfolios in the next two months by selling disappointing funds and replacing them with potentially better ideas for the longer run.

And if a fund is held in a taxable account, Uncle Sam will help: Realized losses on funds can be used first to offset any capital gains an investor may have realized, and then to offset ordinary income, up to $3,000.

"It always makes sense to improve your portfolio, and if you have a loss, that's like icing on the cake," said Roy Weitz, a self-appointed fund industry gadfly who founded the Web site

"With a "sideways' trade, you can re-establish your position in the same market sector and have the government subsidize your move a little bit. If you're in a taxable account, it's kind of a no-brainer."

As an example, Weitz said, an investor could sell a laggard large-cap growth fund such as MFS Emerging Growth (down 20.6 percent a year in the past three years) or Vanguard U.S. Growth (off 25.5 percent a year in the same period), and put the proceeds into Bramwell Growth, a large-cap growth fund that has performed far better during the bear market, losing 6.4 percent a year over the past three years.

Of course, just because a fund has held up better than its peers in the bear market doesn't necessarily mean it will excel if the market recovers.

But a bear market can expose professional stock pickers' weaknesses. For fund owners, it's worth asking whether they can do better with new managers.

Doug Fabian, editor of the Successful Investing newsletter, said investors need to guard against complacency even though the market overall has been dispiriting.

"I'm encouraging investors to be more active with their fund portfolio," said Fabian, whose Web site,, maintains a quarterly "lemon list" of laggard funds. "It's like tending the garden _ it needs maintenance."

Through last week, the average U.S. stock fund was down 20.7 percent for the year and an annualized 7.1 percent over three years, according to fund tracker Morningstar Inc. in Chicago.

By making a switch right away within the same fund category, investors can stay exposed to the same segment of the market, so they probably won't have to watch in agony if their former fund roars back to life. Major stock market indexes have advanced for four consecutive weeks, raising new hopes that the bear market may finally have run its course.

It never makes sense to let the tax tail wag the investment dog, as the experts say, but realized capital losses can be of significant help to taxpayers.

Investors can use a loss to help shelter the taxable portion of a gain from a home sale, for example, said Philip J. Holthouse, partner in the Los Angeles tax law and accounting firm Holthouse Carlin & Van Trigt. That could come in handy with the sale of a vacation home, but in most cases profits already are tax-free on the sale of a primary residence, up to $250,000 (single) or $500,000 (married.).

Losses that exceed realized capital gains can be written off against regular income, up to $3,000 per single taxpayer or couple filing a joint return. (If spouses file separately, the limit is $1,500 each.)

Because regular income, such as wages, dividends and interest, is taxed at a higher rate than capital gains, a $3,000 capital loss applied against regular income can come in handy. For a California taxpayer earning $50,000, a $3,000 capital loss works out to about $1,100 in combined federal and state tax savings, Holthouse said.

In addition, losses beyond $3,000 can be carried forward indefinitely. So if you were unfortunate enough to plow, say, $200,000 into an Internet stock fund two years ago, you might have a lifetime worth of write-offs available if you sell the fund.

Even investors who have been in funds since the earlier days of the 1990s' bull market might have surprising paper losses, said Russel Kinnel, director of fund analysis at Morningstar. Investors who reinvested their annual capital-gains distributions over the years may have a higher "cost basis" for tax purposes than they realize because those reinvestments were used to buy more shares as prices rose.

The fund-swapping strategy carries numerous caveats:

In a tax-deferred retirement account such as a 401(k), it's pointless: Just as gains don't hurt you, tax-wise, in those accounts, losses don't help.

While "no load" fund investors generally don't have to worry about fees when entering or exiting a fund, those who prefer "load" funds, which come with advice of the professional advisers who typically sell them, might find that swapping is not worth the extra commissions.

Investors must focus on their specific gain or loss based on their personal holding period.

"Don't make assumptions," Weitz said. "If you've held Invesco Dynamics for a long time, even though it's a stinker, you might not have a loss in the fund." Indeed, that fund is down 18.6 percent a year over the past three years, but up about 9 percent a year over the past 10 years.

Usually, it makes sense to stay within the same fund category when making a switch, analysts say. This guards against performance chasing: buying into a hot _ in other words, expensive _ fund category rather than a bargain.

For long-term investors, performance chasing can be costly. Just ask those who bought technology funds in winter 2000, when that mania was peaking.

Yet some investors may have good reason to change categories when swapping funds, Fabian said. "Think of this as a chance to see if you are properly allocated," he said. "If I'm dubious about tech, I'm not going to be dumping Pimco Innovation just to turn around and buy Fidelity Select Technology."

Investors also can address overlap, Fabian said: "Do you really need three large-cap growth funds?"

When making a swap, investors need to be careful about the IRS' so-called wash sale rules. If you sell a stock or fund at a loss, and then buy one that is "substantially identical" within 30 days, the IRS considers it a "wash" and voids the tax break.

Selling Fidelity's Standard & Poor's 500 index fund and buying Vanguard's, or vice versa, would raise IRS eyebrows, Holthouse said. Buying another blue-chip fund such as Fidelity Contrafund or Vanguard Total Stock Market Index would be fine, however.

Perhaps most important in the swap decision, funds need to be judged fairly _ not simply sold because they are down. In a bear market, just about every stock investment loses ground.

Kinnel said he would consider a fund's three-, five- and 10-year records against its category average.

"Even the best funds have bad years," he said.