Rebalancing a Portfolio

If you've assembled your portfolio carefully, your asset allocation-that is, how your money is spread among stock funds, bond funds, and/or short-term investment funds-represents the right balance for your goals, time frame, and risk comfort level.

For most people, maintaining the same target asset allocation from year to year-keeping a portfolio balanced-makes sense. Even investment professionals make the effort to keep the asset allocation of their portfolios from drifting off course. It's important to avoid being exposed to unnecessary risks by accumulating too big of a position in a particular asset class.

To keep your strategy on track, a portfolio needs to be rebalanced every so often. Many investors find it convenient to do this once a year. It involves calculating how much of your account value is represented by each asset class and comparing that with similar calculations made a year earlier. If there is a change, you transfer money from the funds that have increased in value into the other funds in the portfolio to get back to where things were at the beginning of the year.

For best results, rebalancing should be done at regular intervals, at least annually. The frequency depends on two factors: how much your investments have changed in value, and whether events in your life might cause you to re-evaluate your goals and strategy, and, therefore, your investment mix.

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