NEW YORK (CNN/Money) - We are bleeding to death with our small-cap growth fund, which is down more than 30 percent since we bought it. We're retired and living on a fixed income, so we're thinking of selling the fund and getting out of the market. What do you think?

-- Jeri, Newberg, Oregon

You're talking about two different but related issues here: should you bail out of this fund and should you also bail out of the market. Let's take them in the order I think they ought to be addressed...that is, the market question first, and then the fund.

You say you're retired, which certainly argues for keeping a good portion of your money in more secure investments like cash, CDs and bond funds. On the other hand, with many people these days living well into their 90's, you probably still need to have a portion of your portfolio invested for growth. And that means owning some stock funds, which can provide gains that will keep the purchasing power of your portfolio ahead of inflation.

I know that now the stock market might not seem like the place for growth. But in fact investors who buy stocks in the wake of big downturns tend to earn higher returns over the long run that those who make their buys when stock prices are booming.

So the first issue you've got to settle is how your assets should be divided up among cash (CDs, money funds and the like), bonds or bond funds and stocks or stock funds. Our Asset Allocator tool can help you with that decision.

Now we can move on to the fund question. I don't blame you for being concerned about sticking with a fund that has lost 30 percent of its value. Who wouldn't be? But that doesn't mean there's necessarily something wrong with the fund or that you necessarily ought to sell.

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Fact is, it's not at all unusual for funds that specialize in small stocks to take big spills occasionally. Small stocks are much more volatile than large ones, so small-cap funds are too. It sounds to me as if your small-cap growth fund is acting like, well, like a small-cap growth fund.

The entire category is down about 30 percent so far this year alone. So it appears your small-cap-growth fund is probably doing what it should, which is lose money in a punishing market for small caps.

Of course, the reason people buy small-cap funds that can be trounced in markets like today's is that they can soar to big gains during rising markets. The idea is that over the long term, a small-cap growth fund will compensate you with higher returns for taking on the fund's higher level of risk. But following this higher-return-for-higher-risk strategy doesn't make sense if you can't tolerate the losses. If 30 percent gains keep you up at night, you'll likely end up buying this kind of fund when it's doing well and then bailing out for a loss during a market downturn. Which is what it appears you're about to do now.

As I see it, you've got two basic choices. Once you've got an idea of how to divvy up your portfolio among cash, bonds and stocks, you might consider whether this fund could still play a role in the stock portion of your portfolio. A person of your age should certainly keep the bulk of his or her stock holdings in large-company-stock funds because they tend to be more stable.

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But that doesn't mean you couldn't also have a small portion of your stock holdings -- say, 5 to 10 percent -- in a small-cap growth account. If the fund now represents a bigger share of your portfolio, you could sell off enough shares to whittle it down to the right proportion.

The other choices is to just admit this isn't the fund for you, sell and take the loss. You can at least use the loss to offset gains in other investments. (For more on how to do that, click here.) Either way can work, but the decision should reflect your overall investing strategy given your financial situation, not just your disappointment at losing money in a specific fund.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 8:40 am on CNNfn.