Rebalancing

The moment you invest in the market, the underlying assets in which you are invested will begin to fluctuate in value, for better or worse. Though you might initially begin with a conservative allocation model that consists of 40% stocks, 40% bonds and 20% cash, the stock market may experience a downturn, decreasing the relative value of the stock portion in your portfolio. For example, say your stocks are decrease in value to the point where the money you have invested in stocks drops to only 20% of your portfolio. With only 20% of your total holdings invested in stock, your portfolio would be much more conservative than you initially intended because stocks are generally riskier than bonds and cash investments.

You can rebalance your portfolio in a variety of ways, returning it to the allocation you're comfortable with. One option is to sell a portion of the asset class that is performing relatively better and investing the proceeds in the lagging class. Or, you can invest additional cash or purchase new investments in the asset class that has lost value. Investment professionals typically advise rebalancing once a year.