During the first period of a man's life, the greatest danger is: not to take the risk. - Søren Kierkegaard

You can follow two approaches with asset allocation:

• Strategic Asset Allocation (SAA) is where you think of an asset allocation that you want to adopt, and then every year or so you reset the portfolio back to this asset allocation.

• Tactical Asset Allocation (TAA) is a more active strategy. Instead of determining one asset allocation that you are going to use for all time, you think up a new asset allocation that you think is going to provide the best returns for the next period, presumably giving greater weight to asset classes that you think are going to go up the most.

Most financial planners use SAA, but if you want to take a more active role in such things and want to keep a closer eye on your portfolio, you could use a TAA approach.

There are a number of ways that you could determine a TAA, I personally use a contrarian TAA strategy, mechanically allocating more funds to whatever asset class that fell the most (or rose the least) last year. You might also use some sort of relative valuation model, based on interest rates and inflation and corporate profits etc etc you determine which asset classes represent the best value.

Having made a decision to adopt a strategic or tactical asset allocation strategy, the next question is how often should you rebalance the portfolio.

Both momentum and anti-momentum are well established effects in the market. Momentum (whatever is going up the most right now) seems to persist over periods under a year, so rebalancing a portfolio every week isn't going to help much, you'll sell out of things right in the middle of up-moves often and buy into declining assets (known as "trying to catch falling knives"). In addition you'll generate too much portfolio turnover, which tends to reduce tax efficiency by generating too many capital gains distributions and increasing switching costs.

Anti-momentum, or contrarianism, is an effect I attach so much significance to that I have devoted a whole section of the FAQ to it!

Although debate on this topic is ongoing, several authorities, including William Bernstein (author of The Intelligent Asset Allocator) say that a good frequency to rebalance is once a year or once every two years. More frequent than that generates costs and takes away from returns caused by positive momentum effects, and less frequent than that allows portfolio allocations to get too far out of kilter and you miss out on taking advantage of contrarian (anti-momentum) effects.

I prefer a variation that prescribes a minimum of selling, and that is to allocate new funds and dividends in such a way as to rebalance the portfolio. The portfolio will generate between 2 and 5% pa in dividends, interest, capital gains distributions and rent annually.

You could set up a dividend reinvestment plan of some kind and have them all reinvested in their original asset classes, but I would favour using the funds for sector top-ups instead. You also might want to make new savings contributions, again this money can be placed in the underperforming asset classes first, hopefully negating the need to do any selling at all.

If you don't sell, you won't get any capital gains distributions. This means you will have more money working for you in the market because of the virtual interest-free loan the tax office has given you for all that tax you will have to pay some day.