The investment markets have gone through another wild year – fortunately, this time, the volatility was generally in a positive direction. But the dramatic swing in stock returns after three bear years, along with dramatic swings in some other types of assets, again raises a question all investors should answer every year: Do I need to rebalance my portfolio?

Rebalancing a portfolio involved periodically readjusting its mix of assets. Smart investors start by establishing an initial asset allocation, assigning percentages of the portfolio to assets such as stocks, bonds and cash, and perhaps other types of investments such as real estate and commodities. The allocations are further broken down by subcategories, such as different types of stocks and bonds.

The target allocations should be appropriate for that investor’s investment goals and financial circumstances, as well as comfort level with certain types of investments. Smart investors also readjust the target allocations to reflect major changes in their personal financial circumstances.

Why rebalance? Why not just let your portfolio ride – especially if the market’s going up? Because if you don’t, you increase the risk that you won’t achieve your investment goals.

Let’s look at your portfolio in the wake of the big returns of 2003. Large-cap stocks represented by the Dow and the S&P 500 gained more than 28 percent on a total return basis last year. The tech-oriented NASDAQ climbed a staggering 50 percent in value, and according to the Financial Planning Association (February 2004) real estate investment trusts returned more than 38 percent. Many international stocks did well. Meanwhile, bonds stumbled, with the exception of “junk” bonds, which soared 29 percent, according to Lehman Brothers U.S. High Yield Index.

What impact did these major market changes have on your portfolio? Did they alter you original asset allocation? How much did they alter the mix, and should some of the investments be rebalanced?

How much to allow a specific asset category to shift before readjusting it is up to you, but a common guideline is five percent. Taking the time to speak with your financial advisor may better help you position your portfolio for all your long term needs, despite what the markets are doing.