Rebalance Your Investments -- Now

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Since the dark days earlier this year, the stock market has bounded sharply higher. Major market measures have gained 50% from their lows and are notching solid double-digit gains year-to-date.

Given the remarkable run in share prices, prudent, long-term investors should consider rebalancing their holdings to lock in gains and return their portfolios to a more diverse position. Advisers usually tell investors they should do this at the start of each year. But the highly volatile nature of the past few years, coupled with the huge gains in stocks since March, argue for a modestly more-aggressive approach to rebalancing.

Rebalancing at the New Year is more a product of habit than necessity. You could rebalance every March 23 or Aug. 18, if you liked. Or quarterly, as some advisers recommend. The important thing is to do it at least once a year in order to stay true to the asset-allocation strategy you've adopted.

"The exception to doing it annually or on a calendar basis is when you see significant shifts in asset values," says David Fleisher, co-founder and president of Firstrust Financial Resources in Philadelphia. "A 50% rise in the stock market, as we've seen, would qualify."

Investors' Year-End Ritual

One reason planners push rebalancing at the turn of the calendar is that most people are focused on their finances at that time. New Year's resolutions, the looming tax season and book stores filled with "Start Over!" financial books are big reasons people focus on the balance of their portfolio at the start of the year. Peer pressure can have its benefits.

But uniformity gets less applicable every day. Companies pay bonuses (when they do so anymore) at different times throughout the year. Lots of people pay taxes quarterly. And financial market data, once only available in comprehensive fashion at the turn of the year, are now ubiquitous and free online.

This year, it makes particular sense to consider the rebalancing act earlier than usual. After rising sharply from the lows, stock prices have started to tread water. The Dow Jones Industrial Average has been hanging around the 10000 neighborhood. Even those advisers who don't really like the idea of systematic rebalancing are advising investors to reduce their stock exposure as part of their long-term planning.

"I don't really believe in a preset asset-allocation model. Investors today need to be more opportunistic," says Tom Ruggiero of RWE Wealth Management in Orlando, Fla. "You can't be too rigid or you miss opportunities. All that said, we've been telling clients that they should take a little money off the table after the gains we've seen in the stock market."

Mr. Ruggiero thinks the market could still record gains from here through the end of the year; in fact, he expects it. But he also doesn't want clients to get too greedy. While his firm was "gung ho" about stocks at the start of the year, share prices have now risen to around what he considers fair value. Future gains will likely derive from momentum more than fundamentals, he says, which means they may be short-lived.

Adding to concern among some advisers: After some particularly lean years, pros will be just as eager to ride momentum to lock in gains. Managers of hedge funds, mutual funds and institutional funds are generally paid based on calendar-year performance. Given their collective edginess, volatility is likely to amplify as Dec. 31 approaches.

In such an environment, it might make sense to consider rebalancing today. Your stocks have probably done well, your commodities -- if you focused on metals and energy -- even better, and your bonds have trailed the field. Depending on your asset-allocation choices, you will probably need to sell some stocks and commodities and acquire some bonds to return to a balance.

Interest Rates May Be Rising

"Investors need to be careful not to jump out of the pot and into the fire," says Mr. Fleisher. He acknowledges that investors should consider booking their stock gains and adding to bond positions, but they should be careful about their bond investments. High quality, short- to medium-duration bonds are probably the wisest bet, Mr. Fleisher argues, since he believes we're getting close to a cycle of rising interest rates.

Rebalancing is easiest done in retirement accounts where the rebalancing doesn't carry any tax implications. For taxable accounts, the calculus is a bit trickier. You may have losses from previous years that you've been able to carry forward, which would cushion the blow. But you don't want to rebalance early if you are still bearing a tax burden from a similar move earlier this year. If you aren't certain about your tax position, it's wise to consult a financial planner before rebalancing.

The important thing about rebalancing is making sure that you remain diversified. Strong runs of success in certain parts of your portfolio -- technology in the late 1990s, energy a couple years ago and bonds in 2008 -- could create an imbalance and leave you vulnerable to outsized losses. Rebalancing ensures that you record gains and return to a diverse footing, which is the wisest stance for long-term investors.

Write to Dave Kansas at dave.kansas@wsj.com