Over the course of time, the portfolio which we have so carefully constructed to match our risk tolerance and time horizon, will tend to move away from its original asset mix. We may start out with an initial allocation of 50% for each of our equity and fixed income investment classes, but after a year or so, the ebb and flow of the markets may cause our portfolio to change and hold 60% in equities and 40% in fixed income. We have “drifted” away from the original mix we had determined would best suite our investment style – risk tolerance and time horizon.

What’s an investor to do? Leaving our portfolio to continue to move away from our allocation goal leaves us vulnerable to portfolio fluctuations we are not prepared for or comfortable accepting. After all, establishing an asset allocation in the first place, was to insure that we invest within our risk tolerance zone and stay on course so that we can ride out market fluctuations. A proper asset allocation will help us make our investing decisions based on reason and not emotional reactions to portfolio fluctuations.

Maintaining our asset allocation is essential to successful investing. It requires that we review our portfolio and determine what percentage is in each of the asset classes: equities, fixed income, and cash equivalents. An annual review and rebalancing is sufficient, anything more frequent can lead us into trying to “time the market.” Set aside a date each year for your review and rebalancing. Choose one that is significant so that it is easy to remember. The month of your birthday is always good, unless it comes during busy times such as the annual family vacation or the holidays. June 1st has always worked well for me.

Rebalancing will help you take advantage of the “sell high and buy low” principle. You will be selling investments in asset classes which have appreciated and buying into classes which have declined or lagged. This will also keep you from trying to time the market or panicking when markets take a dive and you have more than you comfort level will tolerate in one asset class.

When you review your portfolio and determine the current percentages in each asset class, be sure to include ALL investments that you are responsible for managing - personal investment accounts, and IRAs. Also include employer-sponsored defined-contribution plans (401(k), 403(b)…) if you make the investment selections. View all of your investments as one portfolio for purposes of maintaining your asset allocation.

Review Chapter 14 in Investing for Retirement - Surviving a Financial Tsunami for further details on rebalancing your portfolio.