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So once you have your investment asset allocation in place, you’re set, right? Not so fast. Remember the Callan chart which shows that some asset categories outperform others depending upon market conditions? Well, those asset classes and categories that perform better may become a larger and larger percentage of your portfolio, thus changing your asset allocation, as well. That’s where rebalancing comes into play.

When you rebalance your portfolio, you reallocate your investments by buying and selling asset classes or categories to realign your investments to the intended weighting or percentage amounts you selected based upon your time horizon and risk tolerance. For every comment that reallocation is “buying more of underperformers”, there are just as many Enron-esque stories of someone losing the majority of their retirement assets in their 60’s or 70’s because they were invested too heavily in one investment or sector of the market at the wrong time.

How frequently you rebalance is up to you and your financial advisor. There are some investment allocation services which, for a fee, will invest and reallocate your portfolio at specific intervals, or on an ongoing basis. Or, you can have a mutual fund manager take care of the rebalancing timing for you by investing in either asset allocation funds or target date maturity funds, the cost of which is covered in the fund’s operating expenses.

Asset allocation funds are managed so that the investment in the individual fund meets a stated asset allocation from conservative to aggressive. To understand what allocation the manager is targeting, always read the fund prospectus. That will not only tell you the allocation goal, but also how much flexibility the manager has in reaching the intended allocation. In most cases, the allocation in these types of funds does not change over time. Therefore, as your personal investment goals change from growth to income as you get closer to retirement, so too would your need to invest in different allocation funds to meet your changing allocation goals.

In comparison, target date maturity funds are “life-cycle” allocation funds. They, too, are managed to a desired allocation; however, that allocation will change over time from more aggressive to more conservative based upon a stated target or retirement date (usually declared in the name of the fund). Again, always read the prospectus, because even the interpretation of the target date can be different from one fund to another. While one fund may use the target date as the absolute date the most conservative allocation should be reached; another may use that date as an expected retirement year, and manage the allocation to a date 20 or so years beyond the target, so as to mirror the life expectancy of an average investor.

For more information on risk, asset allocation and rebalancing, check out the SEC’s Beginner’s Guide to Asset Allocation, Diversification and Rebalancing, or contact your financial advisor.