Allocating your assets and diversifying your mix of investments are two of the most important steps toward making your retirement program work effectively for you, but proper planning doesn’t end there. Even the smartest choices need to be evaluated and rebalanced now and then.

What is rebalancing?
With inevitable shifts in the market, even a well-diversified portfolio can drift away from the desired investment mix. Many investors may not realize that it is possible to improve investment returns and reduce portfolio risk by adjusting the asset allocation back to their original target—an investment discipline known as rebalancing.

Why rebalance?
The mix of investments in your portfolio can change for a variety of reasons—fluctuations in the market, relative performance of funds, account contributions or withdrawals. However, if one asset class consistently outperforms the others or contributions to one asset class are greater, the asset allocation will drift away from the desired mix—this could hinder your long-term returns. Furthermore, the appropriate asset allocation may change as you near retirement, adjust your wealth requirements or general expectations in the market shift. No matter the reason, these changes should be addressed.

It’s important to rebalance your asset allocation periodically. It is better to rebalance on a regular basis than to be tempted to change your investment allocations unwisely as a hasty reaction to a market correction. Consistency is the rule of thumb.

Periodic Rebalancing
Periodic rebalancing is the most common approach. Simply review the balance of your assets regularly on a specified schedule—once a quarter or twice a year, for example. It's not usually necessary to rebalance more than once a quarter unless stock and bond returns have diverged by at least 10 percent.

Keep in mind, however, that the application of asset allocation and diversification concepts does not ensure safety of investments.  It is possible to lose money investing in securities.