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Pogo, the central character of the 1970s comic strip by the same name, said, “We’ve met the Enemy and He is us”. Current day investors should also take notice of this statement. We very well may be our own worst enemies when it comes to investing. Human nature plays a role in our investment decision making process and ultimately in the overall returns achieved.

Benjamin Graham, dubbed the Father of Modern Security Analysis said, “People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick to them.” I strongly agree with this proclamation.

By establishing an Investment Policy Statement you as the investor and your financial advisor have established parameters and guidelines to keep each of you on track and safe from our sometimes incorrect emotional reactions.

Neuroeconomics is a relatively new scientific study of the relationships between money and your brain. Different areas of our brain process emotions compared to facts. The science of translating these activities into investment decisions is fascinating.

Here’s the short version so those of us without medical degrees in neuroscience can follow along. Being human, we are subject to unconscious emotions and experience monetary mood swings. For example think about how you may feel a flusher than usual flush right after payday and perhaps you feel a bit more frugal immediately after paying your monthly bills.

The way money comes to us and how it is labeled is also quite important. The Bush Tax Reform of 2001 gave every taxpayer a rebate of up to $600. The operative word here is rebate. How do you react when you hear the word “rebate” compared to the word “reimburse” and will it influence how you’ll handle that money?

If someone has won the lottery, the propensity is to splurge or indulge for yourself or others with this newfound money. On the other hand, a year-end bonus is received with pride and most often saved or invested. Or an inheritance may evoke feelings of responsibility and implied stewardship of the funds received from a loved one. You can see how the mind plays a part in the emotions tied to your finances.

My most rational thoughts tend to occur more often after a good night’s sleep rather than while watching a television broadcast by a screaming stock tauter. We’re all influenced by emotions and our actions often reflect that. I only suggest that investors pause, and at the very least, count to ten before making any major decisions.

Let’s say you established your portfolio with a mix of 60 percent equities, 30 percent fixed income investments and 10 percent cash allocated to match your financial goals and risk tolerance level. It would be great if that was all we had to do, but it doesn’t work that way.

Over time, some elements of your portfolio gain while others drift back. Your 60/30/10 allocation for equity/fixed income/cash can easily become a 77/16/7 allocation. Now equities, which are riskier, constitute a higher percentage of your portfolio. Such changes occur because investments don’t all move in the same direction at once. Good years for equities, for example, allow that portion of your portfolio to grow faster than the others. What to do? Time to rebalance.

There is only one way to restore your portfolio’s original balance — buy and sell investments until you re-establish the original mix. You may also want to examine your goals and determine whether the original allocation is still in line with those goals or if they may have shifted a bit too. Once you decide, you could lighten up on some equity positions and reinvest the proceeds in the fixed income portion to restore the original balance. However, you will probably trigger capital gains taxes on your sales.

If you make new investments into the underachieving areas of your portfolio, there are no tax consequences. Alternatively, consider having your dividends and capital gains distributions paid into a money market account to be reinvested in the lagging sectors — you won’t be paying any more taxes than if you had reinvested that income. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

How often should you rebalance? Once a year, or at least every 18 months, seems sensible and reasonable. The key is doing it regularly, as you would any other maintenance activity, like rotating your tires, changing the oil in your car or spring cleaning. Keep in mind there is no need to panic over a slightly out-of-whack portfolio.

One final thought: it is said that Benjamin Franklin used an asbestos purse. Supposedly, this was so money would never burn a hole in his pocket. Think about it!

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Darcie Guerin is a financial adviser and branch manager at Raymond James & Associates Inc. at 606 Bald Eagle Drive, suite 401, Marco Island. Contact her at Darcie.Guerin@raymondjames.com, 389-1041 or toll-free (866) 343-0882.