I'm sure many of you make adjustments to your portfolios in December. But how many of you take the next step and reevaluate your entire portfolio? Now is an ideal opportunity to perform three simple steps to ensure you're on the right track for 2008 - review your goals, determine your asset allocation and make adjustments as needed. Why not use the start of the new year to "take stock" of your portfolio?

Asset allocation is a major factor in long-term investment success. Most investors understand the importance of diversification - the concept of spreading your exposure over many investments to reduce the risk of any one investment. In other words, "Don't put all your eggs in one basket." But equally important, and perhaps less understood, is the idea of asset allocation - constructing a portfolio with exposure to equities (U.S. and international), fixed income (bonds), and cash suitable to your individual goals, time horizon and feelings about risk.

Here's the rub: Once you've got your portfolio in shape, things change. Markets move, obviously, and your situation can change. Either or both can have an impact on your asset allocation, and either or both can require rebalancing or reallocating.

Market forces may necessitate rebalancing. Here's a simple example that highlights how market dynamics require a new balance. My hypothetical investor is a 44-year-old with $250,000 in her retirement account. Obviously, with at least 15 years to go before retirement, she has a long-term time horizon. She also happens to be comfortable with risk, meaning she has a fairly aggressive but not unreasonable asset allocation - 75 percent of her portfolio is invested in equities with the remaining 25 percent in bonds.

Now it's January, and she decides to take a fresh look at her portfolio. Turns out the equity portion of her portfolio did quite well, posting an aggregate return of 15 percent, while the bond portion lost 5 percent. That's a great result for the years at whole; her $250,000 portfolio has grown to $275,000. But that also means that her asset allocation has changed. Now the equity portion of her portfolio represents 78.4 percent of her portfolio and the fixed income is just 21.6 percent. Her portfolio is slightly overweighted to equities and underweighted to fixed income.

If she wants to maintain a constant risk/reward profile, she needs to rebalance. To get back to her target allocation of 75 percent equity/25 percent fixed income, she should sell some of her equities and use the proceeds to add more fixed income investments. She'll be, in effect, selling high and buying low, precisely what you hope to do.

That's a pretty easy example, but the analysis becomes a bit more complex when you start to add accounts (you may have multiple Individual Retirement Accounts, 401(k) plans or a taxable brokerage account) and begin to divvy up your portfolio pie into more slices. For example, large cap vs. small cap stocks or value vs. growth. But the principle remains the same: Once you've determined an appropriate asset allocation for your portfolio, and this is relatively easy to do using online tools or the guidance of an objective adviser, you should periodically reevaluate your total exposure to stay in sync.

Many financial services companies provide online tools to help you determine your asset allocation and compare it to a target. Or you can create a simple spreadsheet that will give you a good feel for where you stand. You don't have to be too exact, but assuming your goals remain the same, you'll probably want to do some periodic selling and buying to get things in line with your target.

Note that if you do need to rebalance your portfolio, do it in the most tax-efficient way possible. For example, if you must take a loss, you'd rather do it in a taxable account where you can get the tax benefit. You can also rebalance without incurring taxable events; if you need to add equity exposure, direct new money into your stock funds rather than sell a position.

In general, evaluate your portfolio at least once a year, and consider "pruning" any asset class that's outpaced its target by more than about 5 or 10 percent. And when markets are moving dramatically, you may want to rebalance more often.

Changes in your situation may necessitate reallocation. Another good January exercise is to look again at your target asset allocation in light of changes in your goals or time horizon. And if you've been investing by the seat of your pants - without a target allocation - now's a great time to determine the mix that's right for you. Let's take the same hypothetical investor but fast-forward 15 years. Now she's 60 years old and planning to retire at age 65. She still needs a growth component in her portfolio, but now the short-term risks of the equity markets are more frightening; she can't really "afford" the risk of an aggressively allocated portfolio. She could understandably pick a less aggressive asset allocation, something like 50 percent equities and 50 percent bonds. This time she's reallocating instead of rebalancing.

Ultimately, successful investing is a continuing work in progress. You start off at some point with a set of goals, and you determine an appropriate asset allocation that reflects your objectives, your time frame and your feelings about risk. That's a critical step, but market forces and changes in your own situation both dictate a need for periodic evaluation. What a great way to start the new year!