From Here to Financial Happiness

Day Sixty Seven Keeping Your Balance

The goal of investing is to buy low and sell high. This sounds easy, but it isn't. We get swept up in the euphoria of rising markets and invest more in stocks than we should. We're spooked by plunging markets – and find ourselves paralyzed and perhaps even panicking and selling.

How can you avoid this foolishness? It all starts with your asset allocation. You set target percentages for your basic mix of stocks and bonds, and also for cash investments and alternative investments if you plan to include those in your portfolio. For instance, your target allocation might be 55% stocks, 35% bonds, 5% alternative investments, and 5% cash investments. Every so often, you should check where your portfolio stands relative to those target percentages.

If you have more than the 55% you intended for stocks – which will happen when a market rally increases the value of your stock holdings – you should do a little selling to get your stock allocation back in line with your target. Conversely, during a market decline, you'll find yourself with less in stocks than planned. That should prompt you to shift some money from other parts of your portfolio so you get your stocks back up to 55%.

This process of occasionally tweaking your investment mix is known as rebalancing. It's a great discipline to adopt, and it'll force you to buy low and sell high. Along the way, you'll control how much risk you're taking, as you keep your stock allocation at a level that ...