As an example, starting in 2000 a portfolio with 50% in the S&P 500 and 50% in the Lehman U.S. Aggregate Bond index would have had just under 60% in bonds at the end of 2007.
One way to avoid this drift is to periodically rebalance a portfolio back to its target asset allocation. Rebalancing helps reduce risk and reduce the severity of fluctuations in account value.
It is wise to set a schedule for rebalancing, say on your birthday or semi annually. This helps take the emotion out of when to buy or sell. Or set percentage ranges, say up or down 5% from your desired allocation.
The strategy you choose should be based on the type of account and how the changes will be made. Taxable accounts should be rebalanced with new money or with offsetting gains and losses. This is done to limit or avoid paying taxes and limit trading costs. In retirement accounts, rebalancing is easier because you don't have to worry about taxes but you still have to consider trading costs.
