NEW YORK (CNN/Money) - There are 6,000 mutual funds out there. Look at the glass as half full, and you've got plenty of choices. But look at the glass as half empty and you realize there are hundreds of horrible funds that could wreck your portfolio.

The truth is, it's just as important to avoid lousy mutual funds as it is to find the real gems of Wall Street.

Take American Heritage, which breaks several cardinal rules of fund investing. It has 85 percent of assets in one stock. The expense ratio is 11.5 percent -- about ten times higher than the norm at other funds.

When one of its stocks hits, you win big -- the fund earned 75 percent in 1997, for example. But it has lost money four years in a row. And not just a setback of a few percentage points, but rip-roaring, portfolio-whupping losses of 30 to 60 percent a year. A $10,000 investment in 1990 was worth just $2,942 in January, according to Morningstar.

"This is really a horrible fund," said Russ Kinnel, an analyst at Morningstar.

OK, so American Heritage is unique. But there are plenty of bad funds out there -- how do you know if it's one to avoid like the plague? It isn't easy when virtually every category of fund is under water. Here are three warning signs that a fund is a dog.

Most of your stock funds are probably losing money right now, with the Dow fighting to stay above 10,000. But one sure sign you should avoid a fund is if it lags its peers. For example, let's say you want to add mid-cap growth, and you're considering PIMCO Mid-Cap, squeaking by this year with a gain of 0.8 percent, according to Morningstar. That might seem lukewarm, but mid-cap growth funds in general are losing 4.8 percent.

Three warning signs you should steer clear of a fund       • 1. It's a bad performer • 2. It's expensive • 3. It has bad ideas

Check a fund's year-to-date performance, as well as its returns over longer periods, and compare it to its benchmark (usually the S&P 500) and the category average. You can do that at CNN/Money by clicking here to generate a Morningstar fund report. Or, click here for our fund screener, which lets you search by category performance.

A surefire sign it's a dud is if it made it onto Fabian Investment Resources' Lemon List, published since 1998 by Doug Fabian. The list includes funds that have lagged their categories by more than 25 percent for the quarter, the past year, three years and five years.

The ten worst offenders this quarter are AIM Value, MFS Mass. Investors, Vanguard U.S. Growth, Putnam Investors, Fidelity Aggressive Growth, T. Rowe Price International, Putnam Vista, Vanguard International Growth, AIM Charter and AXP Growth. A record 560 funds, about 25 percent of all equity funds, are now classified as lemons, according to Fabian. The list of lemons grew 40 percent this quarter.

"Every fund manager on this list should be fired," Fabian said. "They should sell real estate. They don't know how to pick stocks."

Morningstar also has a new list of panned funds, based on a number of factors, including performance.

Every penny you pay to a fund company comes out of your returns -- so you'll have less in your pocket with a more expensive fund. You can't compare expenses across the board because they vary depending on the type of fund.

More on mutual funds:       • Looking for a fund? Try the MONEY 100 • When to bail out of a fund

The average actively-managed, no-load mutual fund will cost roughly 1 percent a year in expenses. An index fund will be much cheaper, around 0.20 percent. Some investing styles, such as international funds and small-cap funds, will cost more because in many cases those funds need bigger research staffs.

For example, Frontier Equity, a small growth fund, will cost you an exorbitant 32 percent a year, according to Morningstar. (No, that's not a typo.) The fund has the dubious distinction of being the most expensive fund tracked by Morningstar. Part of the reason is the fund is small -- roughly $300,000 in assets.

Tech funds average 1.8 percent, but you'll pay a hefty 5.1 percent for class K shares of Invesco Technology, the most expensive in the category, according to Morningstar. Mid-cap growth funds average 1.5 percent, but Phoenix-Zweig Growth & Income is most expensive at 2.9 percent.

And in small blend funds, the average is 1.43 percent, but the most expensive is Class C shares of Pacific Advisors Small Cap, at 5.7 percent.

Last, but not least, you should look at your fund's investing strategy. Did the manager load up on tech stocks on after the Nasdaq started heading south in March 2000? Did your fund invest a big stake in a dotcom that went bust? Whether it's a bad stock pick, a gimmicky strategy or poor fund management, dumb ideas will torpedo a mutual fund every time.

AIM Euroland Growth, for example, seems like it was dreamed up by marketing people, Kinnel said. In 1999 it changed its strategy to focus on companies that would supposedly benefit from the introduction of the euro. (For example, it invests in some financial companies, he said.) Its three-year annualized return is a loss of 8.6 percent.

Another bad idea is IPO Plus Aftermarket, which seeks to invest in hot IPOs, Kinnel said. The has two problems -- the IPO market has been in a funk, and the fund didn't have great access to hot offerings even when things were going better, he said. The fund has a three-year annualized loss of 24.4 percent, according to Morningstar.

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(American Heritage, Frontier Equity, AIM Euroland Growth and IPO Plus Aftermarket all made Morningstar's panned fund list.)

Other gimmicky funds come and go: The Pauze Tombstone Fund, which invested in funeral stocks, went to its glory in 2000. The Y2K Fund, which invested in companies that were supposedly going to benefit from Y2K fears, eventually turned into Emerald Technology. The StockCar Stocks Index invests in companies involved in auto racing.

Of course, managers will argue that not every idea will deliver the goods on Wall Street all of the time. Heiko Thieme, manager of American Heritage, said his fund has most of its assets in Senetek because he still believes in the stock. The British company has a skincare product and an impotence drug that is injected into the penis. He expects the stock to rise 400 percent or more in the next 18 months.

Even Warren Buffett has his down years, Thieme pointed out. If you bought Buffett's shares in June 1998, you'd be down around 15 percent.

"We're standing by our convictions," Thieme said. "We are the risk takers of this business. I will always listen to companies who have a dream and who can substantiate those dreams."