Typically, if one of your asset classes deviates by five or more percentage points from your target allocation, you should consider rebalancing. Take, for instance, a portfolio that had an asset allocation at its target of 60% equities, 30% fixed-income investments, and 10% short-term investments at the beginning of a year. Then, over the course of that year, equities declined by 33% while the value of the fixed-income and short-term investments remained the same. At the end of the year, the allocation to stocks-the portion invested for the growth needed to maintain future purchasing power-would have dropped to 50% of your portfolio.

If you find yourself in a similar situation where your portfolio's allocation is off your target, you'll need to rebalance by selling overweighted assets and buying underweighted assets. As you take steps to return to your 60% equities target, for example, it's also important to take a look at the subsectors within each asset class. For instance, imagine your stock holdings were diversified as follows: 60% in large-cap stocks, 20% in small- and mid-cap stocks, and the remaining 20% invested internationally. If large-cap stocks generally performed better than other sectors, your allocation to that subsector may exceed 60%, so it might be appropriate to buy more shares of small- and mid-cap and international stock funds than large-cap stock funds to more accurately bring your portfolio back to your target allocation. For suggested allocations based on your time horizon, reference our Investing by Time Horizon chart.

Some types of accounts, such as IRAs or company retirement plans, may offer an automatic rebalancing service. Alternatively, if you don't feel comfortable managing your portfolio allocations and prefer not to do your own rebalancing, consider investing in a T. Rowe Price Retirement Fund. The Retirement Funds gradually shift their allocations to become more conservative over time as each fund moves toward and past its target date.

After a year of steep declines, it may feel safer not to take any action at all, but waiting to rebalance could increase your inflation risk if your imbalanced portfolio has less growth potential than your original targeted allocations.

The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility.