Another new year beckons. Undoubtedly, investors will face many challenges throughout 2008, due to ever-changing conditions and fluctuations in the equities markets. But you might have a better chance at withstanding the ups and downs if you rely on the principle of asset allocation.

Caveat: Be aware that asset allocation is not a cure-all for financial ills nor does it provide any guarantee of success. Although the basic concept is fundamentally sound, investors are still subject to the economic risks and other factors beyond their control.

Now that we have established the parameters, let’s return to the basic premise.

Asset allocation is the process of dividing your portfolio among different kinds of investments, such as stocks, bonds and cash, in order to maximize potential benefits while minimizing investment risks. The exact allocation should reflect your personal situation and long-term objectives.

Typically, you should allocate a certain percentage to a particular asset class. For instance, hypothetically speaking, an investor might decide to assign 50% of his or her investment portfolio to stocks, 25% to bonds, 15% to money market funds and the remaining 10% to cash or cash equivalents. This may be a satisfactory allocation for this individual’s personal comfort level.

Note: Don’t assume that these hypothetical designations are appropriate for your situation. The actual percentages and/or types of investments you choose for your own portfolio will probably differ.

If you have not yet assigned asset allocation percentages to your portfolio, the beginning of the year is a good time to do so. On the other hand, if you have already gone through the asset allocation process, don’t think that your work is done. Reason: A portfolio that met your specifications a short while ago might have become “unbalanced” of late.

In fact, it does not take much to throw this delicate balance out of kilter. As a result, you may currently be bearing more risk than you would ordinarily like or you could be disproportionately favoring one investment class over another. At the start of each year, you should review your holdings and make any necessary adjustments.

How often should you rebalance your portfolio? It depends on its size, its nature and your personal preferences. For active traders, a review may be recommended each quarter or even every month. At the bare minimum, you should analyze the allocation once a year.

Alternatively, a review may be triggered if percentages fall outside of a prescribed range (e.g., 70% stock holdings for the hypothetical investor with a 50% original allocation to stocks).

Finally, there are several other factors to consider, including potential costs for switching from one asset class to another and income/estate-tax implications. Keep up-to-date on changes in the economic climate that could have an impact on your portfolio.