This has been a year many mutual-fund investors would like to forget.

With one month to go, the average diversified U.S.-stock fund is down 40.6 percent for the year, and the average long-term bond fund is down 11 percent, according to fund tracker Lipper Inc.

The Standard & Poor's 500-stock index declined 30 percent over the past three months, its worst three-month percentage slide since 1987.

Even the pros are feeling battered by the market meltdown and related developments across the corporate landscape, such as the failures of some bedrock financial institutions.

”When you step back and think about it, it's absolutely staggering what has happened,” says Mark Donovan, co-chief executive officer of Robeco Investment Management in Boston.

But as tempting as it may be, now is not the time to toss the unopened monthly account statement into the wood stove. There are steps - besides easing into the holiday season with well-spiked eggnog - that bruised investors can take to soften the blow of losses and prepare for the months ahead.

Investors, for instance, should be reviewing their asset allocation. Some may have to acknowledge they took on too much risk for their own comfort; for others, rebalancing after a big slide in stock prices will mean putting more money to work in stocks while they are cheaper.

In hindsight, with the S&P 500 down 43 percent from its peak in October 2007, many investors have concluded they were too heavily invested in stocks and stock funds.

One rule of thumb is that your bond allocation should be approximately equal to your age. So if you're 65, you should have 65 percent of your portfolio in bonds and the rest divided between stocks, alternative investments and cash-like vehicles.

John Coumarianos, an analyst for Chicago-based mutual-fund researcher Morningstar Inc., suggests that a retiree have no more than 20 percent in stock exposure. But many retirees, “encouraged by financial planners or brokers,” beefed up their stock allocation in recent years and then got clobbered, he says. “It hasn't looked unusual to see a retiree with 50 percent or 60 percent stock exposure. People are starting to rethink that.”

If you've decided your previous stock allocation was too high, you might not need to do anything at all: The percentage of your portfolio in stocks has been slashed by the sharp drop in value of stocks and stock mutual funds. But if the stock percentage is still higher than you want, shift some of your assets over to bonds.

Coumarianos suggests doing it gradually: “Try to give yourself 24 months,” he says, so you can recoup some losses if there is an upswing in the stock market.

Many analysts now like corporate-bond funds for a portion of a bond portfolio. They are providing higher yields than usual compared to super-safe Treasury bonds, as investors insist on being paid more for the risk they are taking by owning corporate bonds.

One good option might be iShares iBoxx $ Investment Grade Corporate Bond Fund, a collection of highly rated bonds. The exchange-traded fund is yielding about 7 percent and has a low 0.15 percent expense ratio. For most investors, the fund is appropriate as a complement to a diversified bond portfolio - it shouldn't be your only bond fund.

Even if you have a reasonable target allocation between stocks and bonds, there is still work to do. Your actual allocation may have shifted considerably in this year's shaky market. Likely, the bond funds in your portfolio outperformed the stock funds _ resulting in a weighting change that calls for moving more dollars into hard-hit stocks.

Many investors' allocations are now “out of sync,” says Paul Mazzilli, an analyst at Morgan Stanley. You should be “rebalancing,” he says, or buying and selling portions of your portfolio in order to get back to your original asset-allocation strategy. If your strategy has changed, you can also use rebalancing to tweak your asset allocation.

While no one knows what the stock market will do in the coming days or weeks, many money managers say it's a good time to buy bargains in beaten-down sectors that may be oversold because of forced selling by mutual funds and hedge funds that need to meet redemptions.

For instance, Donovan says Robeco continues to be bullish on selected technology shares, including Hewlett-Packard Co., which he says is cheap relative to the company's performance and strategy, including its recent acquisition of Electronic Data Systems.

One note of caution: Avoid buying into a mutual fund that is about to make a capital-gains distribution, because you will get taxed on that money. Fund companies started announcing planned distributions last month. You can check a fund company's Web site or call its toll-free number for distribution information.

Some investment professionals think it won't be a problem to delay new investments until after the year-end distribution season. George Feiger, chief executive officer of Contango Capital Advisors Inc., in Berkeley, Calif., says bargain-hunting fund investors should “wait until '09 is under way.” His suspicion: “If it's cheap today, it will be cheaper after the end of the year.”

Sure, the stock funds in your portfolio look awful this year. If you have a stock fund that is down 40 percent, that's par for the course. “Large- or small-cap, growth or value, domestic or international, losses have been significant in every type of stock fund,” writes Eric Kobren in Fidelity Insight, the independent newsletter he edits.

But if there are some funds in your portfolio that have been trailing their peers over a longer time, it may be time to sell and upgrade to funds you think will do better in the coming years.

In recent years, some investors hesitated to sell unexceptional funds because they didn't want to realize gains on which they would owe tax. The recent downturn has eliminated many of those gains, taking away a tax disincentive to spiff up your portfolio.

Experts suggest investors examine a fund manager's record over three years, five years and 10 years. If you have a marginal manager, “this would be the time to go to a manager who is better and hopefully will outperform on the way out” of the market downturn, says Will Muggia, the president and chief investment officer of Westfield Capital Management in Boston.

One stock fund he likes is CGM Focus. It is run by Kenneth Heebner, who is one of the most experienced fund managers in the industry but who is having a terrible year along with his peers. CGM Focus, a high-risk concentrated fund, is down 49 percent this year, but ranks in the top 1 percent of Morningstar's “large blend” category for the past three years, five years and 10 years.

A good year-end strategy is “tax-loss harvesting” - selling positions that have lost value since purchase and using the realized losses to trim your tax bill. You can swap into a similar fund to maintain the overall complexion of your portfolio.

”Harvesting tax losses is a great way to make your portfolio more efficient,” says George Padula, a financial planner with Back Bay Financial Group Inc. in Boston. You're making the most of paper losses while still maintaining your investment strategy.

Investors may want to consult a financial adviser or an accountant for help, but the strategy is fairly straightforward:

¦ Say three years ago, you bought shares valued at $100,000 in a large-cap mutual fund, and today that stake has a value of $85,000, leaving you a $15,000 unrealized loss.

¦ You sell the fund, thus realizing the $15,000 loss. Then, use the $85,000 in proceeds to purchase another fund with the same objective - in this case another large-cap fund or, Padula suggests, an exchange-traded fund with a similar strategy.

With an exchange-traded fund, you generally don't have to worry about a capital-gains distribution that can happen when you buy a new mutual fund. Also, ETFs are low-cost and may track a particular index better than a mutual fund, he says.

¦ At tax time, you apply your $15,000 loss against any capital gains made elsewhere in your portfolio. Say your other gains are $10,000; the realized loss offsets that profit and leaves you with a net loss of $5,000. Under tax law, you can then deduct $3,000 of the net loss from your ordinary income and still have the remaining $2,000 as a loss to carry forward to future years.

You can later return to the original fund - but under tax law you must wait 30 days.

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