I am 26 years old, I make close to $46,000 a year, and I'm hoping to go back to school for a graduate degree in the next few years. I have gotten myself into an awkward position. Last March I had accumulated $30,000, and I was faced with the choice of either paying off $25,000 in school loans or investing the money. The market was red hot back then, and I took an extremely aggressive, non-diversified stance because I wanted the money to grow as quickly as possible over two to three years so I could pay off the student loans and still have money left. I put $30,000 into six Janus funds, and by late in October I had a loss of 7 percent. Now I'm questioning my strategy. Should I take the loss and sell my shares? And if I do that, should I reinvest it in some other mutual funds? Or should I pay off the school loans?

Paul's Answer:

Well, I can tell you there is one consolation in your story, and that is that you have plenty of company. There were many investors your age who saw the red-hot market last year and up through March, and who jumped on the bandwagon with everything they had. Your losses of 7 percent (which must be about $2,100 of your $30,000 investment) are much milder than many other investors suffered. But of course that loss is still very real to you.

Permit me to give you a little lecture, which I will try to keep brief, and then we'll look at what you should do.

Life presents many opportunities for you, but there are no real shortcuts to attaining wealth. Everything you do has a cost. The cost of being very conservative is that you don't get the astonishing gains of a red-hot market. The cost of being very aggressive is that you can lose some of your money - actually a lot more than you have lost.

Don't ever forget this: High returns almost always come bundled with high risks.

What you should have done last March was pay more attention to the risks of the funds you were considering. You can do that easily by checking at Morningstar's web site. There, you could have found out in a matter of minutes what these funds had done to investors in the third quarter of 1998, the most difficult recent period for most investments.

Using the six funds you named, you could have found they had the following one-quarter performance: Janus Mercury, down 6.9 percent; Janus Worldwide, down 16.1 percent; Janus Enterprise, down 14.6 percent; Janus Balanced, down 4.5 percent; Janus Olympus (in which you invested one-third of your $30,000), down 7.9 percent.

Therefore, you should have concluded that you had every right to expect these funds to be down at least that much in a three-month period. And if you were not willing to withstand that, you should have concluded you had no business investing in them. You should have regarded losses of that magnitude as perfectly normal. Your research might not make this obvious, but funds like these have a built-in potential of a 30 to 50 percent loss in any 12-month period. Therefore, what you experienced this year is perfectly normal.

Next time you consider investing in a mutual fund, do this simple bit of research and ask yourself if you are really cut out to be in that particular fund.

In your case, you cited a very ambitious goal: making a ton of money in two to three years. That amounts to speculating that market conditions would be favorable in this short period of time. In other words, you were essentially counting on luck. And now, less than one-third of the way through the time period you set for yourself, your investments are performing in a perfectly normal pattern and you are considering throwing in the towel. Obviously you did not prepare yourself adequately for what it would take to ride those mutual funds all the way to the future you envisioned.

So what should you do? Your first choice is to keep the funds or sell them.

If you sell, you will have to figure out what you will do with the money, which is still more than 90 percent of what you had in March. So you could say this choice allows you to do whatever it was that you SHOULD have done back then, and do it now - only with a little less money.

If you keep the funds, you will have to figure out if you're willing to "keep the faith" through whatever pain they may dish out until the end of your three-year time period. And at that time, you will have to sell them for whatever they are worth. Would you sell them at that time even if you were still at a point of a 7 percent loss?

There are no perfect answers to those questions. But it might be easier if you approach your situation from another direction. To summarize the facts as I understand them: You are faced with student loans of $25,000, and you want to go back to school in a few years. You will need to finance that education in some fashion. You have about $28,000 in investments and an income of $46,000 a year.

So here's one way to look at it. With your income, you should be able to make the payments on your student loans. They are probably relatively low-interest loans and you probably have a long time to pay them off. So I would not try to apply your $28,000 to them. Simply regard the payments on those loans as a cost of living, and meet that expense from your income.

That leaves you with $28,000 of investments and a future need for money on which to go to graduate school. You still have more than two years to go before your investment time period is up, and more than two years to go, apparently, before your plan for graduate school. So you could simply leave your investments where they are and figure that whatever they are worth when you are ready for graduate school, that's what you will have available to pay for that education.

The missing ingredient is some measurable objective for your investments, and I can't give it to you. But once you declare it, you'll know how to invest appropriately.

I'll give you two examples of how you might state this, in order to illustrate the process of clarify your thinking.

1) I know I will need $50,000 (you figure out the number, this is just an example) to go to graduate school, and I am willing to wait until my investments reach that point before I enroll. If that happens sooner, then I go back to school sooner, and vice versa. 2) I know I want to go to graduate school in the fall of 2004, and whatever money I have at the time will determine whether I can be a fulltime student or whether I'll have to work part-time while I'm in school.

If the first objective is true for you, and you are truly willing to wait as long as it takes, then you can invest just as aggressively or as conservatively as you want and you'll get whatever results you get.

If the second objective is true, then you are too aggressively positioned. In this case and sticking only with Janus, I'd put half your money in Janus Balanced and split the rest three ways equally in Olympus, Worldwide and Mercury. That's far from a perfect allocation, but it will keep you pointed in the right direction.

Then in six months from now, I'd sell your whole position in one of the last three funds and put the proceeds in the Janus Short-Term Bond Fund. Do the same thing six months after that and again six months later. By that time, 18 months from now, you'll have half your money in the balanced fund, where a significant amount of it still can grow if the stock market is booming. But the bulk of your investments will be protected in the relatively low volatility of bonds. You won't get spectacular returns. But you'll have the money you need for graduate school.