Does rebalancing belong on your year-end to-do list? Reviewing your asset mix before the new year can help ensure your portfolio still reflects your goals and risk tolerance. But while rebalancing is a key investment strategy, there are several approaches to deciding how—and when—to do it.

Join Heath Grossman, CFP® in this week’s Money Wisdom Question Series as he breaks down the benefits of rebalancing and explains when it makes sense to build it into your financial plan.

What Is Rebalancing?

Rebalancing is a time-tested portfolio management approach of adjusting your investments back to their intended asset allocation. For instance, during significant market growth, an investment that made up 5% of your portfolio might now represent 10%. You may choose to trim back on that well-performing investment and reallocate funds to lower-performing investments.

What Are the Benefits of Rebalancing?

Rebalancing is a popular financial strategy, especially for long-term investors. This process can help maintain your desired level of risk over time and encourage disciplined behavior during market fluctuations. Rebalancing can also potentially improve your long-term investment portfolio performance.

When Should You Rebalance?

One way to decide when to rebalance is the calendar-based approach, which means rebalancing on a set schedule. Or, if you decide not to rebalance annually, semi-annually, or quarterly, there’s also the threshold approach.

In this case, you only rebalance when an investment moves a certain percentage above or below its target allocation. A third method is the hybrid approach, which combines the calendar-based approach with the threshold approach.

So, what’s the right rebalancing schedule for you? A financial advisor can help you understand your individual risk tolerance and choose the strategy that fits your unique plan.