Your asset allocation strategy helps reduce the risk in your investment portfolio by

 determining what percentage of various asset classes to hold.

However, because different investments have varying rates of return, your asset allocation will stray from your desired allocation over time. Thus, you should periodically review your portfolio to see if it needs to be rebalanced. Some points to keep in mind include:

Decide how much variation you are willing to tolerate in your portfolio. It is difficult to maintain your portfolio at precise percentages, so you may want to allow some leeway. For instance, you might monitor your portfolio more closely when an asset class varies by five percent and start to rebalance when it varies by 10 percent. But make sure you adhere to these guidelines. Sometimes it can be difficult to sell an asset that is performing well and reinvest those funds in assets that are not doing as well. However, your asset allocation strategy was designed to help manage the overall risk in your portfolio. By allowing one asset class to dominate, you increase your portfolio's risk.

Review your overall allocation strategy. Over time, your strategy may change as your financial goals and objectives change. For instance, you may want a high percentage of your portfolio in stocks when you are younger, but may want to shift more to fixed-income investments as you approach retirement age. However, don't use this review as an excuse to arbitrarily change your allocation. For instance, don't cut way back on your stock allocation simply because you're uncomfortable with the stock market volatility.

Evaluate the tax ramifications before selling assets from taxable accounts. If selling an asset for rebalancing purposes will result in a tax liability, look for other ways to accomplish this goal. For instance, you may be able to rebalance in your tax-deferred portfolio, which typically won't result in a tax liability. Or any new investments can be placed in assets that are underweighted in your portfolio. You can redirect periodic interest, dividends, or capital gains to other asset classes rather than reinvesting them in the same asset. Any withdrawals can be made from overweighted asset classes.