NEW YORK (CNN/Money) - So you own a dog.

Your large growth mutual fund is lagging the S&P 500, as well as every other large growth fund on the planet. It's twice as expensive. And the manager had this lame-brained idea to buy Enron last fall. Duh!

Sure, it's a shock to realize you own a lousy fund in your portfolio that could postpone your retirement several years. But wipe the cold sweat off your brow and use the opportunity to do some portfolio rebalancing. Here are three steps to get you back on track.

When it comes to rotten mutual funds, there's no time like the present to sell. (Click here to read more about how to figure out if you own a terrible fund.)

Three steps to selling a lousy fund:       • 1. Sell immediately (we mean now) • 2. Find a replacement • 3. Learn from it and move on

If you own it in a tax-deferred 401(k) or IRA, there are no tax implications. So whether or not you've got a loss or a gain, sell the sucker.

"If you've decided the fund is a loser and you don't want anything to do with it, just clean house," said Peter Di Teresa, an analyst at Morningstar.

In a regular taxable account, you're of course better off if you can take a loss, since you can use it to offset a gain when you calculate your taxes for this year.

"You have to be smart and see what the tax consequences will be," said Bud Kasper, a certified financial planner in Kansas City, Mo.

Let's say you sell one fund and have a $1,000 gain. You sell a second fund and take a $2,000 loss. Right there, you've wiped out any capital gains on the $1,000 you earned on the winner. If you've owned the fund for at least a year, it means you've saved long-term capital gains of 20 percent, or $200.

Even if you have a bigger loss than a gain, you can apply the loss to capital gains in the future. That means if you took a $20,000 loss on a fund this year (ouch) and offset a gain of $10,000 on another fund, you've got a $10,000 loss that you can use towards other capital gains. Or, you can use up to $3,000 a year to offset taxes on ordinary income, Kasper said.

Look at the bright side: Your fund is so bad that you'll have plenty of better alternatives.

To find a replacement, look for a fund that is doing better than its category. For example, let's say you're looking for a fund that invests in large-growth stocks. Large growth funds are down 8.9 percent this year and down 17.1 percent in the past year, according to Morningstar. It's unlikely you'll find a big winner but you'd want a solid fund that is performing better during those periods. Also check its performance against its benchmark (usually the S&P 500.)

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.

Other factors to consider? Look for a lower-than-average expense ratio. The average for large growth funds is 1.45 percent. You also want a fund with a veteran at the helm -- somebody who has weathered up and down markets. At Smith Barney Aggressive Growth, for example, manager Richard Freeman has been manager Nov. 1, 1983.

Understand that everybody gets zinged by a bad fund once in a while. There may be a manager change. The manager may have been convinced that telecoms were the place to be (not!!) Or, a fund may change owners and the new guys come up with some hare-brained strategy. It may also be a victim of the bear market -- a lot of investors bailed out, and the managers had to liquidate stocks to meet redemptions.

Related stories:       • Funds to avoid • Wanted: A few good tech funds • Five bond funds to survive market hell

You're not alone. Perhaps you bought Fidelity Aggressive Growth in late 1999, when the fund was wracking up a 103 percent gain. It was a top performer, right? It was one of the best options in your 401(k). Now it is among the worst performers in its category, trailing in the past one-year, three-year and five-year periods.

Take it as a life lesson, sell the shares and move on. You may hold out some hope that it will turn around. But do you really want to make a gamble with your nest egg? Definitely not.