Q. In a recent column you mentioned Massachusetts Financial Services Funds. I have owned Massachusetts Investors Growth Stock fund for over 30 years and it is my largest mutual fund holding. I would have left it years ago, but the taxable gain always scared me off. The fund has always communicated poorly, and its habit of laying on capital gains at the end of the year cost me dearly. With the share price so low now perhaps I should bite the bullet and sell.

What say you? Is MIG ever going to be able to recoup its losses of the past three years? I am in my early 80's, so I don't have a lot of recoup time left. If I do sell where would you suggest I park the money?

  ---W. W., by e-mail

  

A. It's true that MFS domestic equity funds did poorly in the bear market. As I pointed out recently, their managed domestic equity funds lost money at an annual rate of 14.96 percent in the three-year period ending June 30. Comparable Fidelity funds lost at a 5.38 percent rate during the same period and comparable American Funds lost at only 3.46 percent. That's quite a difference.

If you check the Morningstar analysis for this particular fund, however, you'll find that it has consistently done better than the Russell Index of 200 large growth stocks. While its recent performance has lagged its "large growth" stock category, it has been in the top 15 percent of large growth funds over the last 10 and 15 years.

Unfortunately, it gave up a good deal of that performance by being less than tax efficient. With a 225 percent portfolio turnover rate, virtually all of the return was realized each year and much of it was in short-term capital gains. If that was painful in previous years, it will be even more painful in the future as you stare at the yawning gap between a 15 percent capital gains tax rate and your ordinary income tax rate. Funds like this are best held in tax-deferred accounts.

The good news is that you can probably redeem the shares with virtually no tax consequences. If you invested $10,000 thirty years ago and reinvested all dividends and capital gains except for withdrawals to pay income taxes, you would currently have no tax liability, according to Morningstar Principia Pro. (Your actual tax liability will depend on whether you sold shares to pay taxes, other withdrawals or additions, etc.) So this would be a good time to redeem your shares.

What to do with the money? Invest in something with a lot less volatility. You could, for instance, exchange to MFS Total Return A shares without paying a commission. A balanced fund with a good track record, it would cut your volatility in half and provide a current yield of 2.8 percent.

  

Q. I recently sold my home. The profits from the sale constitute 90 percent of my total net worth. So I have about $300,000 sitting in my bank account. I have read your columns about the Couch Potato Portfolio and I am inclined to go with a 50/50 stock/bond split.

With interest rates at their current levels, however, I am afraid to put any money into the bond market. Should I dollar cost average into the Couch Potato portfolio or should I dive right in?

--- T.T., by e-mail

  

A. Since you no longer have virtually all of your net worth tied up in personal real estate, how about trying a somewhat different path? Start by investing 30 percent of your money ($90,000) in a broad market index fund such as Vanguard Total Market or the iShares Russell 3000 exchange traded fund (ticker IWV), 25 percent ($75,000) in a REIT fund such as Vanguard REIT index fund, and 10 percent ($30,000) in I Savings Bonds. This will leave 35 percent ($105,000) in cash.

In January 2004, add another $30,000 to your I Savings Bonds and $30,000 to your equity fund, leaving you with 15 percent ($45,000) in cash.

In January 2005 add another $30,000 to your I Savings Bonds, retaining 5 percent cash.

This will commit you to diversified assets over a period of time and increase your inflation protection. It will also increase your overall portfolio yield because the real estate investment mentioned yields about 5 percent.