Asset allocation is a time-proven strategy that can help take the guess-work out of choosing invest-ments for your portfolio. Instead of putting all your eggs in one basket, you spread your eggs (dollars) among a variety of baskets (stocks, bonds and cash).
The baskets can be further divided within each type of investment.
Although many investors understand that they should invest in a variety of securities, they often stumble when it's time to choose an asset allocation that's right for them. The allocation that you choose should be based on how much risk you are willing to assume, why you are investing and when you will need to tap your investments.
However, in some cases, once investors choose their allocation, many are afraid to change it. As you experience changes in your life, it can be appropriate to redistribute your assets. So, when should you change your asset allocation? It is important to maintain balance in your portfolio. Accordingly, you should reevaluate your allocation strategy at least once a year or when you experience a major life change such as marriage or the birth of a child.
It is not always necessary to make a fundamental change to the allocation, but you need to evaluate that regularly.
Sometimes your portfolio might just need a tweak to rebalance assets that have either increased or decreased in value. For example, a booming stock market may mean that the value of the stock portion of your portfolio exceeds your original allocation. If that occurs, you may want to consider selling some stocks to bring your portfolio back into line with your initial allocation. Rebalancing is a strategy that every investor should take advantage of as a way to ensure their portfolio reflects their current investing goals, time horizon and tolerance for risk. Further changes to your allocation also may be appropriate depending on your particular investing style.