This is the third in a four-part series on steps Americans can take in the new year to get their finances in shape.

The new year is a good time to look back at all of the things that happened to you over the past year. Did you fall in love? Get a new job? Have a baby?

Chances are your investment portfolio mix shifted in 2015 too. If so, now might be a good time to rebalance.

When you rebalance, you restore the asset allocation in your portfolio to your original target, or adjust it to an allocation that best fits any revision you may have made to your investment objectives. The goal is to maintain your desired risk level, assuming your objectives have no changed, and to keep your portfolio diversified.

Let's go back in time. Say for example, you assembled a portfolio consisting of 60% stocks and 40% bonds. These proportions, you decided, met your goals and your appetite for risk.

But markets go up and down. So under this scenario, if the stock market performed well, your stocks may have appreciated in value.

It's possible that now stocks make up 67% of your investments, as opposed to the 60% that you intended. To get back to your original target you would have to sell some stock, buy more bonds, or do some of both.

From an emotional perspective, rebalancing isn't an easy thing to do. You might not feel so great about selling securities that are doing well or about investing more in an asset class that has flagged.

But just because an investment or an investment class performed well in the past, doesn't mean it will do well going forward. Stocks, in particular, can be volatile.

It might feel counterintuitive to sell something that is doing well and buy something performing not as well. But you'll be in good shape if that laggard starts to rally in the future.

There is no particular timeframe for how often you should rebalance, but many experts recommend monitoring your portfolio on an annual or semi-annual basis and rebalancing when assets have moved at least five percentage points beyond what you had intended.

Here are three common ways to rebalance:

  • You can sell off a portion of your holdings within the asset classes that are outperforming and then reinvest your profits in the asset classes that lagged behind.
  • A second option: You can invest additional funds into the asset classes that have underperformed and keep the same level of funds going to the other investments.
  • Finally, if you are making continuous contributions to your portfolio, you can peg more of your money to go to the asset classes that are currently below the targets you set, until the targets have been restored.

Keep in mind, rebalancing might trigger potential sales charges and other fees. If you're trading in a taxable account, you might also have to pay capital gains tax on securities that have appreciated in value, and you may be taxed at a higher rate if you are selling assets that you had held for less than a year.

There is another harsh reality of rebalancing: If you sell an investment when the market is doing poorly, you will be locking in your loss.

If this occurs in a taxable account, you may be able to take a tax deduction on your loss or offset your gains. But you can't take a tax deduction on capital losses if you are rebalancing in a retirement account, like a 401(k).

There's also always the possibility that the asset class you pruned will go up in value in the future. That means you will miss out on the upside.

But remember, the goal of rebalancing is to restore your portfolio to a mix that matches your tolerance for risk. It could help you sleep better in the year ahead.

An Alert Investor is a smarter investor.

This article originally appeared at The Alert Investor.

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