A common reason to dump portfolio losers is to benefit from the tax treatment.The IRS lets investors sell losing investments and use the losses to offset gains on other investments, thereby reducing their tax bill. It works like this: If you hold a financial asset for at least a year, and then sell it for a gain, it’s considered a long-term capital gain. Selling the same asset for a loss is a long-term capital loss. You can match gains and losses to avoid paying taxes on the profits. If you think the asset will rebound, you can sell it now, take the tax loss benefit and buy it back after 30 days, but not before 30 days. Always use caution when dumping a losing position, however. You may want to pile into the top performers, but it’s unlikely an asset that’s outperforming all others will continue to trounce its competitors forever. It’s difficult to say which asset will be the best in the future. By dumping a seeming loser now, you may deprive yourself of a future winning position and the diversification it provided your portfolio. Consider why you bought the asset in the first place. Have those reasons changed? Is the company or fund drifting from its original direction? Is the drop a short-term issue or long-term problem? Is there a better investment available? And are you responding to fear instead of reason? Your answers to these questions should help you decide whether it’s best to sell or hold onto your questionable investment.