Huge drops in U.S. stocks at the start of the year beg the question: What is the best way to divide an investment portfolio between stocks, bonds, cash and other holdings? Stocks aren't

the only problem. Bonds look risky, too, as rising yields on new bonds could drive down prices of older bonds that pay less. Commodities and emerging markets stocks aren't doing very

well, either. Jeffrey Coolidge | Getty Images So what should an investor do when the market looks like a minefield? If your portfolio is designed for 60 percent stocks, 30 percent bonds and

10 percent cash, should it stay that way? Most experts say it should, because the broad market has always recovered from even the worst downturns, and because the ideal asset mix assumes a

to be sure your portfolio is still aligned with your financial situation, goals and risk tolerance," said Lena Haas, senior vice president of retirement at E-Trade Financial. "Once

you are confident in your baseline asset allocation, then consider rebalancing." Most experts will tell you that the single biggest factor in investment performance is asset allocation

— the way one mixes the traditionally higher returns from stocks with the greater predictability and safety provided by bonds and cash. Key to the investor's allocation decision is the

time horizon, or how long money can be tied up in each asset class. Money that will be needed during the next five years, for example, probably should not be invested in stocks, which could

be in a downturn when cash is required. But for periods of five years or longer, history has shown that stocks tend to produce higher returns than bonds or cash. That's why a

20-something might have 80 percent or 90 percent of retirement investments in stocks, while a 70-year-old would have far less, putting more into bonds and cash in a bid for safety over

return. Life changes, like marriage, divorce, childbirth or a job switch can also affect one's willingness to take risk, making it wise to alter the investment mix. Fine-tuning your

portfolio for the new year > January is a great time to check in with yourself to be sure your > portfolio is still aligned with your financial situation, goals and > risk 

tolerance. >  > Lena Haas > senior vice president of retirement at E-Trade Financial Hiring a pro to handle your allocation decisions can be costly, so many investors rely on online

calculators or questionnaires to figure the best mix. While that's better than going with the gut, investors are wise to keep in mind the tools' limitations. First, they use past

results to determine the potential risk and return offered by each asset class. There's no guarantee those assets will behave the same way in the future. Second, most of these tools ask

questions to determine the investor's tolerance for risk, inquiring, for example, whether one would buy, sell or do nothing if stocks were to fall by 10 percent. The tool can therefore

recommend an overly conservative asset mix if a worry-prone user doesn't realize that a 10 percent correction is just something to be expected from time to time. A user who is not well

versed in the vagaries of investing may well benefit from the hand-holding and guidance offered by a professional advisor. Generally, experts recommend using an allocation tool from a large

financial services firm, since it takes considerable investment to incorporate all the required factors, such as the performance of all types of holdings, the user's age, years to

retirement and reliance on non-investment holdings, like real estate, a pension and Social Security benefit. Once the investor is satisfied with the asset-allocation goal, the portfolio

should be managed to stay close to the targets. Buckle up! This economic doomsayer sees plenty more volatility January is a good time to think about this because year-end statements from

brokerages, fund companies and banks make it easy to see where you stand, but experts have mixed views on timing and frequency in rebalancing. According to Ophir Gertner, CEO of Invest.com,

investors are smart to think about rebalancing in the weeks before the new year, because selling money-losing investments before Jan. 1 can produce tax savings the next April. Chances are

that if you were happy with your asset allocation at the start of 2015, you won't need a radical change today, since the stock market was virtually flat. And experts caution against

rebalancing too often. The process can take time and money, and a minor shift in asset weights today may well be reversed tomorrow. Dave Louton, finance professor at Bryant University,

recommends rebalancing only after a portfolio has drifted off target by a "substantive amount." "There is no need to reestablish all target weights to the penny," he

said. HITTING YOUR TARGETS John Bucsek, managing partner of MetLife Solutions Group, suggests a two-pronged approach. Investors should reexamine their tolerance for risk at regular

intervals, such as every January, to determine whether some factor, such as the approach of retirement, a marriage or birth, means the mix needs to change. But the rebalancing itself should

be done only when one or more asset classes gets off target by a predetermined amount, such as 5 or 10 percentage points. The rebalancing doesn't have to be done in one fell swoop,

either. "In some cases, it may be more beneficial to simply stop contributing any new funds to the overweighted asset class, while continuing to contribute to the underweighted asset

classes," Gertner said. That way, you can get back on target gradually, without triggering taxes with sales or piling up transaction costs. It's important, too, to avoid becoming a

slave to percentage points. "It's one thing to be okay with a 10 percent loss on paper, and it is another thing when this 10 percent loss means a real loss of $100,000 in your $1

million account," said Stephen Rhodes, a managing principal of Signify Wealth, a wealth management firm in Creve Coeur, Missouri. He suggests investors think in terms of dollars rather

than percentages. KEEP A TAB ON COSTS In rebalancing, investors should also strive to minimize costs such as commissions and taxes. One approach: Do any selling in tax-favored accounts like

IRAs and 401(k)s, where sales of profitable holdings won't trigger taxes. So long as your portfolio as a whole has the asset mix you want, it's not necessary that each account

match those targets. In addition, Haas says investors are wise to consider "asset location." Investments that spin off a lot of annual income, such as funds that pay big dividends

or large year-end capital gains distributions, are best kept in tax-favored accounts like IRAs and 401(k)s, to avoid annual taxes. Meanwhile, "tax-efficient" holdings, like index

mutual funds that have little or no annual payouts, can go into taxable accounts. If rebalancing seems like a daunting challenge, there is a cheap alternative to hiring a pro to do it for

you: a target-date mutual fund. These funds, now offered by most major fund companies, use a specific year, such as 2040 for someone expecting to retire that year, to guide the mix of

stocks, bonds and cash. As the investor ages, money is moved from stocks to bonds to emphasize safety over returns. The target-date fund typically contains several low-fee, index-style

mutual funds. Target-date funds "do a good job of providing this kind of gradual rebalancing of the asset mix, smoothly and at reasonable cost," Louton said. But while these funds

take a lot of the guesswork out of investing for retirement, there are some caveats: Target-date funds don't account for risk tolerances, they're not flexible, and there are fewer

funds to choose from. In addition, some carry a high expense ratio. So be sure to do your research. Is a target-date fund a bull's-eye for your retirement plan? Louton added: "The

general rule is that the more complex your situation and the more money you have to invest, the greater the potential value added from professional input." _—By Jeff Brown, special to

CNBC.com_