While the theory of rebalancing is easy enough to understand, it is often a difficult concept for investors to implement. The problem is that rebalancing goes against your basic instincts. With rebalancing, you are basically selling those investments performing well to purchase those that are underperforming. It might help to remember that you are following a basic investment principle when rebalancing — you are buying low (those investments that are underperforming) and selling high (those investments that are performing well).

There are three basic approaches to rebalancing:

• Rebalance annually. Choose a date to rebalance, perhaps at the beginning of the year, when you receive your annual statements, or at the end of a quarter. On that date every year, compare your current allocation to your target allocation. Any allocations off by more than 5-10% would require rebalancing. Once you have rebalanced, don’t be tempted to make other rebalancing changes during the year. Wait for your next rebalancing date.

• Rebalance when your allocation differs from your target allocation by a designated percentage. With this type of rebalancing, you monitor your portfolio more frequently, perhaps monthly. Once your allocation moves from your target allocation by a predetermined percentage, perhaps 5-10%, you rebalance your portfolio.

• Rebalance based on current market conditions. With this approach, rather than one specific percentage for each asset class, you might have a target range. For instance, you might allocate anywhere from 30% to 50% of your portfolio to large-capitalization stocks. Depending on your views of the market, you might want to allocate near the low or high end of that range. Thus, your allocation will change as your views about the market change.

Once you have decided what needs to be rebalanced, you need to implement those changes. If the change is within a tax-deferred account, such as a 401(k) plan or individual retirement account, those changes can typically be made without tax ramifications. With taxable accounts, you will want to consider the tax ramifications before implementing the changes. If the sale of an asset will result in a tax liability, consider other methods to implement the change. For instance, new investments can be made in the underweighted portion of your portfolio or periodic interest, dividends, or capital gains can be redirected to the underweighted portion. Or you can take withdrawals from the overweighted portion of your portfolio. However, if you can’t implement the changes in a relatively short period, you might want to sell some investments. Asset allocation cannot eliminate the risks of fluctuating prices and uncertain returns.