I just wanted to put out a friendly reminder that if you've been considering moving out of mutual funds and into exchange traded funds, now is the time to get moving. Between now and the end of next month is prime time to implement this strategy. Here is why, and also why you should at least stop investing in mutual funds for a while.

First and most important, many mutual funds are sitting on gains right now. Whether these gains are long or short term capital gains or dividend yields makes little difference. The gains are hidden inside the funds' net asset values. In the coming weeks - usually between early December and the end of the year - mutual funds will pay out these gains in the form of distributions. Any distributions held in taxable accounts will be taxable. You can avoid paying taxes on those distributions if you sell your shares beforehand.

You'll still be obligated to pay taxes on any gains, whether long term or short term, on the sale of those shares, but it may be to your benefit to do so anyway. This is particularly true if you've held the majority of your mutual fund shares for over a year, which takes better advantage of long term capital gains tax rates.

If despite my arguments in favor of exchange traded funds you decided to remain invested in mutual funds, at least stop investing in them for a couple of months. Do it for the same reason I cited above - the coming distribution payouts. Allow me to explain by example.

Suppose next week you make a $1000 investment in your favorite mutual fund at a net asset value (NAV) of $100. Now let's suppose that between now and your mutual fund's distribution date the NAV does not change. But on the distribution date the fund manager declares a distribution of $5 per share in long term capital gains and $10 in short term gains and dividends. The $15 dollar distribution lowers the NAV of your mutual fund to $85; and your account is credited with $150, either in cash or in shares totaling $150 in value.

In January you'll get an IRS Form 1099 stating that you owe taxes on that $150 gain. It doesn't matter that your investment didn't appreciate even one dime. You still owe taxes on the gains.

I used to be a big proponent of dollar cost averaging in mutual funds. It's a great strategy for building small investments into big ones. One of the drawbacks I found, and one of the principal reasons I stopped doing it, was the problem of paying taxes on gains I purchased rather than earned. It's why I'm also not a fan of automatic investment plans, but that's another story.

As a mutual fund owner you have to be mindful of year-end distributions. Don't fail to plan your strategy. If you delay, it could cost you money.