YOU'VE DONE OUR WORKSHEETS and you’ve chosen the appropriate amount of risk to take. But there's still one last step before you’re done: Deciding what to sell from your current holdings to create your short-term portfolio. The first thing you want to do is look at your overall asset allocation to find out if you have the ideal mix of stocks, bonds and cash. You want to keep the allocation intact after your short-term money is removed. Let's say you’ve got $100,000 that is 70% invested in stocks, 20% in bonds and 10% in cash, and you need to take out $25,000 for the down payment on a house. You'll want to refigure the remaining $75,000 to meet your long-term allocation: That is, you'll go down to $52,500 in stocks, $15,000 in bonds and $7,500 in cash. If your allocation is correct, you could simply sell a little of everything and be done with it. But that may not make sense if you're sitting on investments with continued growth potential. Chances are, your stock and bond holdings look a lot different today than they did at the beginning of the year. To get your portfolio back on track, you'll need to do some pruning. Down and Out What to sell? First, look around for your losers. If nothing else, you can use your losses to offset your capital gains at tax time. Here are a few things to look for in a losing stock: Are earnings falling either for the company or the industry? Is it at the wrong end of the economic cycle? Has the company cut its dividend? Has management changed for the worse? Finally, has the stock fallen below $10 a share? (Many institutions are reluctant to buy below that price, so the stock may languish there.) If you answered yes to two or more of these questions -- and you have capital gains to offset -- you should consider selling. The Winners’ Circle As for winners, the simplest strategy would be to sell your stocks with the highest price-to-earnings (P/E) ratios. Another common selling discipline: Trimming back all stocks that have given you total gains of more than 50%. But as we noted, formulas can be too simplistic sometimes. It may simply be the wrong time to bail out of a winner. Instead, we suggest you ask yourself the same questions you did with your losers, with these additions: Is the stock trailing its sector in sales, net profit margins or return on equity? Is the rate of its projected earnings growth less than the stock's P/E ratio? "Yes" answers indicate it's time to get out. Selling funds is easier. Has your fund consistently lagged its peer group in recent years? If so, sell it -- or at least trim it back. Taxing Times Finally, try not to sell stocks or funds you’ve held for one year or less. Why? Because then you'll be stuck paying short-term capital gains, which are taxed at the same rate as your regular income. In other words, you could have to pay as much as 38.6% on the sale (in 2002). Meanwhile, most long-term capital gains (on investments held for more than one year) are taxed at 20%. The difference between 20% and 38.6% works out to roughly $190 on a capital gain of $1,000. For most of us, that's reason enough to hang on for at least a year.