Because mutual funds are required to distribute capital gains that their managers incur during the course of the year, fund investors often receive taxable distributions that they didn't want--or weren't prepared for. (For more about funds and taxes, review Mutual Funds 104.)

But when you invest directly in stocks, you control when you buy and sell your holdings. As a result, you have more power over your tax tab. You can sell your losing stocks--and you'll more than likely have losers to sell--to offset distributed gains from your mutual funds.

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