The developments in the equity market over the past six months and the many reports on the economic and investing outlook for the year ahead may prompt some of you to consider rebalancing your portfolios.

When you rebalance your portfolio, you're reviewing it to determine if your asset allocation is still intact. Normally, the asset mix would change through time due to the returns made on the different asset classes in the portfolio. Therefore, you will need to make adjustments, which are buy and sell different assets in order to restore it to its original allocation to keep your portfolio in line with your investment objectives.

For instance, you invested 50% of your portfolio in an index linked fund and the other half in a fixed income fund. Within a year or two of making your investments, the stock market picks up high. As a result, your index linked fund investment grows and takes up a bigger proportion of your portfolio. In the same timeframe, your bond fund investment registers only minimal growth.

Therefore, the asset allocation of your portfolio has changed from its original mix; from a balanced portfolio, which is 50% equity and 50% bonds, it has become a more aggressive portfolio like 70% equity and 30% bonds. It may no longer be in line with your risk tolerance and you could be in danger of not meeting your investment goals.

Another advantage of rebalancing is that it enables you to lock in the gains made on growing investments and buying other assets at a cheaper price.

It's crucial to periodically reassess your portfolio's asset allocation and there are many different thoughts out there on how often you should do so. The most common practice is to rebalance your portfolio on an annual basis. If you practice strategic asset allocation where you maintain a certain allocation to an asset class, experts say you should not rebalance too often. A common timeframe would be at least a year, if not two or three.

There are also many different opinions on the start point at which one should rebalance one's portfolio. Generally, the rule of thumb is that you should not rebalance a portfolio that has a 10% or less deviation from your original asset allocation.

Moreover, one of the most important considerations when rebalancing your portfolio is the benefits versus the costs. Always remember that when you rebalance a portfolio of unit trust funds, you will incur transaction costs in the form of upfront service fees and also exit fees. Some fund companies offer a limited number of free switches when you transfer assets from one fund to another within the same company, but in some cases, sales charges or front-end fees may still apply. For example, if you switch from a no-load bond fund to an equity fund, you may have to pay the upfront fee and once you have used up your free switches, you will incur a switching fee.

Thus, when considering a rebalance of your portfolio, it pays to remember that unit trust funds are meant to be medium to long-term investments. Therefore, while you shouldn't invest and forget about them, don't rebalance just for the sake of trying to time the market. If you do so, you will be practicing rebalancing for the wrong reasons and you could end up switching too often and incurring costs that will eat into your returns.

Rebalancing is not about timing the market; instead, it is about monitoring your investment and making adjustments, only if necessary in order to ensure that it is in line with meeting your investment goals.

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