NEW YORK (MONEY Magazine) - Speculating about what could happen is a lot more fun than examining what did happen. That's basic human nature.

But human nature, as it turns out, is an expensive habit. Millions of Americans are needlessly accepting poor investment results. Academic research shows that fund investors generally make rational buy decisions, landing relatively low-cost funds with good records from reputable organizations. It's the sales that they botch. Too often, they linger before dumping their duds. And when they do pull the trigger, it tends to be for the wrong reason.

We can quickly dispose of the first error, that of hanging on to losers. The only cure required is discipline. Every year, review your portfolio. For each investment, ask, "If I didn't already own this fund, would I buy it today?" If your answer is no and the reason is because your goals, risk tolerance or other personal circumstances have changed, you have a strong sell candidate.

The trickier issue is if your No is driven only by your opinion of the fund. This calls for more rigorous analysis. Borrowing from ex-Vanguard chief John Bogle, who has frequently discussed the "four Ps" of selecting top investment managers, here are four Ps that should guide your mutual fund sell decision: performance, people, portliness and price.

Performance Of the four, performance is the most problematic. Too often, investors blame a mutual fund for the ills of its investment style. Example: In February 2000, I talked with a man who loved every fund he owned, except for T. Rowe Price Equity-Income. I said yes, the fund had trailed his other investments over the previous five years, but that was to be expected of a staid fund that invested in mature, dividend-paying companies. Since the fund remained a fine example of its type, I urged him to retain it. He sold. You can guess the punch line. T. Rowe Price Equity-Income has risen -- no mean feat during 2000-01! -- while the rest of his portfolio has plummeted.

By my admittedly unscientific estimate, about two-thirds of all fund sales are some variation on this theme. The investor reacts to a fund's absolute performance, rather than the fund's relative showing. Bad move. Since investment styles move in and out of favor every few years, such sales are really just a response to market fashion. To evaluate the true merits of the fund, you need to filter out the noise and focus on the fund's investment category.

Naturally, you'd like to have a fund that is near the top of its investment category. Could happen. Realistically, though, you'll settle for a fund that delivers above-average results without assuming undue risk. Has the fund beaten most of its peers over the intermediate to long term -- that is, over the past three, five and 10 years? If so, you probably have a keeper. If not, what was the reason for its shortcoming? You'll want to forgive a fund that had one bad year, as Brandywine did in 1998. But if the fund's mediocre numbers stem from more than one poor stretch, sell.

People On to the next P: people. It can be difficult to get the requisite information to evaluate your fund managers. Unless you're paying close attention, you're unlikely to hear about comings and goings at fund companies and be in a position to evaluate their significance. Your best option: If your fund undergoes a management change while it's performing well, give it a chance. If its people are leaving at the same time that its intermediate-term returns are poor, exit.

Portliness The third P: portliness (when a fund becomes too popular for its own good). A bloated asset base can hamper the manager's ability to trade securities without moving the market. The trick is, not all funds become fat at the same size. A fund that invests in giant companies like Microsoft and GE can afford to carry a far larger asset base than one that buys tiny over-the-counter securities. But you can address that with the following formula: Asset size should be smaller than median market capitalization of the fund's stocks. For example, if a fund has $2 billion in assets and holds companies that have a market value of about $1.5 billion, you have a problem. Find something nimbler.

Price Finally comes price. This P is the easiest of all. If you ever receive a proxy statement from a fund asking for permission to raise its fees, sell! Remember, mutual fund companies automatically receive raises over time, because they charge a percentage of assets rather than a fixed amount. So as the market climbs, so does their revenue. Shareholder-oriented managements recognize this fact. They don't seek price hikes.

Ideally, you won't have to pull the trigger too often. If you need to drop more than one fund in four each year, you probably made the wrong buy decisions in the first place. But that's a matter for another column.

John Rekenthaler is president of online advice for Morningstar.