Invest Smarter, Part II.

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Author: Kalwarski, Tara

10 Resolutions for 2006/ Do It Later

You've set the perfect investment plan in motion (Resolution No. 2). But over time, as markets rise and fall, that ideal allocation will get out of whack. The solution: Get back on course by periodically selling some winning investments and buying more of your laggards.

Rebalancing your portfolio by lightening up on winners and buying more of investments that have fallen behind feels counterintuitive--and that alone stops many investors from doing it. To get over the mental hurdle, turn rebalancing into a regularly scheduled, unthinking exercise:

• Set a date: Choose one day a year to review your allocations (say, midyear, July 1), mark the date on your calendar and stick to it.
• Get a reminder: Check with your fund company or retirement plan to see if it will give you an online nudge at a preset date.
• 2 Get a Before and After Shot

On Rebalancing Day, first check out the changes in your portfolio:

• Make a pie: Go to your retirement plan's or investment firm's website, where you should be able to generate a chart of your holdings broken down by asset class.
• Do a comparison: Any category that is off by more than five to 10 points from your target allocations is a candidate for rebalancing.
• Get the big picture: If you have multiple accounts, get a consolidated view of all your holdings by inputting your investment info at Morningstar.com, which offers a free tracking tool.
• 3 Fix Your Mix

To get back to your ideal allocation, you'll need to:

• Sell some shares: Lighten up on assets that gained in value, and buy shares of those that fell behind. You can also purchase new shares of holdings that lagged.
• Get a hand: Many retirement plans offer a Web tool that allows you to input your target percentages and hit enter; the plan administrator then executes the necessary trades. And customer service reps at most financial firms will, at your request, crunch the numbers and help you rebalance while you're on the phone. Either way, the whole process shouldn't take more than 20 minutes. --T.K.

If you'd prefer to have a pro do the dirty work of rebalancing for you, consider a life-cycle fund. These funds offer a preset mix of stocks, bonds and cash and adjust their allocations over time. You choose the mix based on when you need your money back.

BEST BETS

T. Rowe Price Retirement Funds 800-638-5660
Vanguard Target Retirement Funds 800-851-4999

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By Tara Kalwarski