INVESTORS TAKE ALL kinds of approaches toward rebalancing: Some rebalance every quarter, some every year and some only after major market moves. What’s the right strategy? Rebalancing every year has the virtue of simplicity and it introduces a healthy dose of self-discipline. But there are five reasons to be a little more flexible.
First, you should pay attention to the investment costs involved. This shouldn’t be an issue if, say, you own no-commission mutual funds bought directly from the fund companies involved.

YOUR MIX OF STOCKS, bonds, cash and alternative investments will be driven by your goals and individual circumstances. Still, it’s helpful to have some guidelines. Consider two approaches.
First, there’s the popular rule of thumb that says that, for retirement savings, you should take 100 and subtract your age. Whatever the result, that’s the percentage of your investment portfolio that you should put in stocks. For instance, the rule suggests a 30-year-old should have 70% in stocks.

ONCE YOU SETTLE ON target portfolio percentages for stocks, bonds, cash investments and alternative investments, you’ll want to check where you stand at least once a year and also after major market moves. Why? You may find you have drifted far from your target percentages.
Let’s say you earmarked 50% of your money for stocks and 50% for bonds. Stocks then plunge 20%, while bonds climb 10%. Result? Your 50-50 mix would now be 42% stocks and 58% bonds.

OWNING A MIX OF stocks, bonds, cash and alternative investments can reduce the chances of a huge short-term decline in your portfolio’s value. That’s crucially important, because the math of investment losses is brutal. If you lose 10%, you need to make 11% to get back to even. If you’re down 20%, you need a 25% gain to recover the money lost. What if you lose 50%? Now, it’ll take a 100% gain to make you whole.

STOCKS FLUCTUATE MORE in value than bonds, so you can calm down a stock portfolio by adding a small position in bonds. The calming effect may be greater than you imagine. Bonds don’t just bounce around less than stocks. They could climb in value when stock prices are tumbling, especially if you own government bonds.
At issue here is the crucial concept of correlation. Most parts of the global stock market are highly correlated.

THE KEY DRIVER OF your portfolio’s risk and return is your asset allocation. The more you have in stocks, the higher your potential long-run return, but the rougher the ride will be. You’re fine with a rough ride? In theory, buying a 100% stock portfolio will give you the highest return.
Still, there are good reasons to hold other assets. Stocks aren’t guaranteed to win, even over long holding periods. During the 10 years through year-end 2008,

YOUR TIME HORIZON, human capital and the other bond-like income streams in your life might suggest you should invest heavily in stocks. These aren’t the only factors to consider, however. Suppose you’re a unionized government worker with 25 years to retirement. At first blush, it seems like you ought to invest most of your money in stocks.
But before you dive into the market, give some thought to how much risk you need to take to reach your goals—and how much risk you can stomach.

AS YOU DESIGN YOUR portfolio, don’t just focus on your time horizon. If you are still in the workforce, also give some thought to how many paychecks lie ahead and what sort of job you have. To that end, you might think about your human capital—your income-earning ability—in three different ways.
First, you might view the paychecks you receive as similar to interest collected from a bond. During your initial decades in the workforce,

IF YOU’RE INVESTING for the long haul, the biggest risk isn’t short-term market declines—unless you panic and sell during those declines. Instead, the big risk is failing to beat back the twin threats of inflation and taxes.
Suppose that, after investment costs, you earn 4% a year. If you lose 25% of that gain to taxes, you’ll be left with 3%. But if annual inflation is also 3%, you are—in financial terms—just running in place.

IF YOUR TIME HORIZON is five years or less, the big threat can be summed up in two words: losing money.
To get a sense for the range of potentially rotten returns, consider the worst annual returns for some of Vanguard Group’s mutual funds. In 2008, when the financial crisis hit with full fury, Vanguard’s S&P 500-stock index fund declined 37%, its small-company index fund fell 36.1% and its total international-stock fund tumbled 44.1%.

HOW DO YOU KNOW you’re a seasoned investor? As you build and rebalance your portfolio, here are eight signs you’re becoming a market veteran:

You have mixed feelings about rising markets. Yes, it’s great that your portfolio has grown fatter. But it also means future returns will be lower. By contrast, tumbling markets excite you because you could get the chance to scoop up investments at bargain prices.
You select stock and bond funds that you would be happy to hold for a decade or longer—and you do indeed hold them for that long.

YOU MAY UNDERSTAND the nuts and bolts of building a globally diversified portfolio. But that knowledge, by itself, won’t ensure success.
Think back to late 2008 and early 2009, when the stock market offered investors a once-in-a-generation buying opportunity, or early 2020, when the S&P 500 tumbled 34%. Did you take advantage—or did you simply sit tight or perhaps even panic and sell? We like to believe we’re clearheaded and rational. But when it comes to managing money,

WE OFTEN SET ourselves up for trouble before we even buy our first investment—by failing to consider why we’re investing. No, we shouldn’t invest to earn the highest possible return, amass as much money as possible or prove how clever we are. Instead, we invest now so we can spend later on important goals such as retirement, the kids’ college or a house down payment.
As you pursue these goals, the amount of investment risk you take should hinge on three factors.

THINK OF PORTFOLIO building as a four-step process. First, consider why you’re investing. That will give you a sense for your time horizon and hence how much risk you can take. Keep in mind that some goals have a harsh deadline, such as the day you make the house down payment, while other goals involve spending your savings over time, as happens with retirement.
From there, proceed to the second step: settling on your asset allocation,

AS INVESTORS DESIGN their portfolio, many will use a 100% U.S. stock portfolio as their starting point and then decide how they’ll deviate. What’s the advantage of this approach? You begin with stocks, which are a portfolio’s engine of growth: They’re the asset class that will give you the best shot at outpacing the twin threats of inflation and taxes over the long haul.
Stocks, of course, also come with the risk of terrible short-term results.