Last year, I bought a bear fund that has since lost more than 30%. Should I sell, or stay put?

QUESTION: Last year, on the advice of a friend, I bought the Rydex Venture 100 (RYVNX) fund, hoping it would be great for a bear market. I used dollar-cost-averaging in order to keep my purchase price down. Now I'm down 30% to 40% on my investment and have no more money to add. Should I sell my investment or hold onto it? I'm worried this fund will make me lose every dollar I put in it.

-- Anonymous

ANSWER: Given the market's recent struggles, you might be feeling at least a little bit better about your fund, which seeks to provide twice the inverse return of the Nasdaq 100 Index. (In other words, if the Nasdaq 100 sheds 5%, this fund gains 10%.) As of May 19, the fund was up 6.2% year to date, according to Lipper.

But let us offer this bit of advice: You may have a very dear friend in the person who suggested purchasing this fund. But it sounds like you don't have a good financial adviser. A bear fund, which performs well when stock prices fall, is not a good core holding for average investors, says David Kathman, mutual fund analyst at investment-research firm Morningstar. "For most individuals, something like this isn't necessary," he says. "It's too volatile and complicated for them to be playing with." And the fact that you have no more money to contribute to the fund indicates that you've probably contributed far too much to this risky fund already.

That's not to say that bear funds never make sense. At best, a bear fund can be used as a hedge against long positions in a portfolio, says certified financial planner Harold Evensky of Evensky Brown & Katz in Coral Gables, Fla. For investors who have large stakes of volatile stocks in their portfolios, investing a small amount in a fund that moves in the opposite direction is one way to reduce overall risk. Sophisticated market timers can also use these funds to reap positive returns over the short-term when they believe the market is heading south. But for average investors, trying to time the market is a losing battle. "It's possible you could get lucky, but that's just luck," says Kathman. "You might as well just go to the casinos."

Even the folks at Rydex Investments say an aggressive fund like the Venture 100 is best used by sophisticated investors who are willing to monitor the fund quite closely. "You need to understand what you're buying," says spokeswoman Dawn Kahler, who notes that the $25,000 minimum initial investment required by Rydex helps attract more experienced investors to the fund family.

For most individual investors, the best shelter against a falling stock market is a well diversified portfolio. That means having the proper weighting of stocks, bonds and cash. In terms of equities, diversification means having the right combination of investments to suit investors' individual risk tolerances, says Andrew Clark, senior research analyst at Lipper. Folks who find themselves worrying that they could lose all of their investment are likely invested in funds that are too aggressive for them. (And let's face it, mutual funds don't get much more aggressive than a double-inverse Nasdaq 100 Index fund.)

Of course, the decision to sell a losing mutual fund is never easy. But one common mistake investors often make is to hang onto a losing investment in the hopes that one day they'll earn back their lost principal. Instead, investors who recognize that they made an initial mistake in buying the fund (if, for example, they didn't fully understand the fund's investment strategy, or are bothered by its volatility) would likely be better off cutting their losses and moving into a more appropriate investment. For what it's worth, selling at a loss creates a nice tax break that can be used to offset gains.

Bottom line? Bear funds can be a useful tool for some investors. But they certainly aren't right for everyone. If they aren't handled properly, bear funds can bite.