Rebalancing your portfolio is just as important as having the right asset allocation. If you've been holding commodities or commodity-related stocks, now may be the time to take profits and refocus on assets that are lagging. It's not a matter of market timing for investors, but rather a strategy built on trimming winners and rebalancing to take advantage of the discounted laggards. (For more information o keeping your portfolio efficient, read our related article Rebalance Your Portfolio To Stay On Track.)

Identify Recent Winners
Investments in energy have handily outperformed the overall market in 2008. The PowerShares Oil ETF (AMEX:DBO) and the PowerShares Energy (AMEX:DBE) are both up over 40% since the beginning of the year. DBO holds oil futures contracts while DBE is a more diversified holding nearly equal holdings of heating, crude, and gasoline futures contracts. Whether driven by speculation or accurate demand expectations both ETFs have benefited from oil futures prices rising above $145 in July. (To learn more about futures contracts, read The Barnyard Basics Of Derivatives.)

The Pullback
Oils strong upward momentum set the stage for its recent pullback near $130 dollars per barrel. Since market timing is nearly impossible, investors may be better off establishing rebalancing routines either by performance or time to trim portfolio winners.

Reallocating by Performance
Let's say you have a 15% return goal in mind for your investment. Once the 15% threshold is reached an investor could simply sell shares equal to the amount of money gained over the initial investment and reallocate the funds to faltering asset. This strategy allows the investor to continue to benefit from the initial investment position, purchase falling assets at a discount, while offering protection from a reversal in the form of profits generated from the investment gain. Retirement accounts like an IRA or a 401(k) are the best places for this strategy in terms of minimizing your tax liability from capital gains. (To learn how to minimize the impact of capital-gains tax, see A Long-Term Mindset Meets Dreaded Capital-Gains Tax.)

Reallocating by Time
An investor could make a commitment to review and rebalance his or her portfolio on a quarterly, semi-annual or an annual basis. For example, an investor with a medium risk tolerance may have composed a 50% stock, 40% fixed income and 10% natural resources (energy) portfolio in January. On a semi-annual schedule, once June arrives if the energy positions have grown to become larger than a 10% portion of the entire portfolio, shares of energy positions would be sold and the earnings would be reallocated to the stock and fixed income buckets. This strategy allows time to dictate when to rebalance rather than performance and can often be setup when opening your investment account.

The TDAX Independence 2040 (AMEX:TDV) and the TDAX Independence 2010 (AMEX:TDD) are two relatively small target-date ETFs that employ the reallocation by time principle to help investors underlying investments take on less risk as they approach retirement. (To learn more about target-date funds, check out The Pros And Cons Of Life-Cycle Funds.)

Conclusion
Rebalancing is a great way for investors to stay in tune with overall market activity and improve returns by capturing gains and reinvesting in laggards. If rebalancing is not for you, know that mutual funds and now ETFs are available to do the job for you.

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