Asset allocation involves setting up a desired distribution of your money between stocks, bonds, and other investments, and then sticking with it over time. To keep your asset allocation stable, you have to rebalance those proportions regularly, by selling some of this and buying some of that, when one asset class has gained or lost more than another.

One question that comes up, though, is how often you should rebalance. Some not-so-admirable financial advisors, for example, will have you rebalance way too often -- perhaps, for example, if your stock target of 75% has grown to 77%. This can rack up commission costs from each trade.

So don't rebalance too often, but do it when you need to. If you haven't rebalanced recently, then you may have missed out on the best time to do so. After all, 2008 featured stocks dropping about 40%. Let's say you began 2008 with $100,000 invested in your desired allocation, which was 70% in stocks and 30% in bonds. Let's also assume that your stocks dropped 40% in 2008, and that your bonds held steady. That brought your $70,000 in stocks down to $42,000 and your total portfolio to $72,000. At the end of 2008, your stock allocation had fallen from your desired 70% to 58%, which is quite a bit less than your target. Shaving some bond assets and adding more to stocks would have brought you back into line -- at a time when bargains abounded in the market.

Have it done for you
If you don't trust yourself to remember to do this, consider target-date funds. Funds like the Vanguard Target Retirement 2030 (VTHRX) fund rebalance for you, keeping your retirement date in mind. This fund recently had 67% of its assets in Vanguard's Total Stock fund, 15% in one of its bond index funds, 9% in its European Stock fund, 5% in its Pacific Stock fund, and 4% in its Emerging Markets fund. Here's a look at its recent performance:


5-Year Annualized Return

Holdings Include

Total Stock (VTSMX)


AT&T (NYSE:T), Cisco Systems (NASDAQ:CSCO), Qualcomm (NASDAQ:QCOM)

European Stock (VEURX)


Sanofi-Aventis (NYSE:SNY), BHP Billiton (NYSE:BHP)

Pacific Stock (VPACX)


Toyota (NYSE:TM), Canon

Emerging Markets (VEIEX)


Teva Pharmaceuticals (NASDAQ:TEVA), Lukoil

Source: Morningstar.

Read about some asset allocation models recommended by my colleague Robert Brokamp in our Rule Your Retirement newsletter, which you can try for free. 

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