Summarize:

Asset allocation refers to the percentage of your portfolio allocated to each type of asset class. Asset classes can include equities (which include stocks, mutual funds and exchange-traded funds), bonds, cash, and much more. Your portfolio should have an appropriate allocation to each of these categories depending on your appetite for risk, and investing goals.  Money-market funds or treasuries have the lowest risk also the lowest returns. Investment-grade bonds are considered higher risk and higher return than money-market funds or treasuries, and stocks are considered the highest risk and highest return options. Therefore, if you are a conservative investor who is more concerned with protecting your capital, while earning a small but stable return, a portfolio of 75% bonds, 15% stocks, and 10% cash or money-market funds would be appropriate. If you are looking for a balance between risk and return, a 50% stock, and 10% cash, and 40% bond approach would be reasonable. If you are an investor willing to take on high-risk is exchange for potentially high returns, 80-90% stocks and 10% bonds or cash would be appropriate. Re-balancing refers to the act of selling or buying stocks to either restore your target asset allocation (as discussed above), or to establish a new asset allocation.  Re-balancing can occur on many time-frames, but an often recommended time frame is once a year, since this reduces fees associated with transactions. Therefore, re-balancing would involve checking on your asset allocation annually.  If you find one asset class has grown beyond your target asset allocation, and you still have faith in your original asset allocation, selling could be a possibility. For example, it is possible that ,if you opted for a 60% stock, 40% bond allocation, this allocation could change to 64% stocks and 36% bonds, if the stock market does extremely well. For example, assume you had a $100,000 portfolio, with $60,000 in stocks and $40,000 in bonds at the end of last year. At the end of the year, you have $80,000 in stocks, and $45,000 in bonds. At this point, your portfolio would be worth $125,000, with stocks representing 64%, and bonds representing 34%. In the above example, if you still want to keep your 60% stock, and 40% bond allocation, you would need to sell some stock to bring it back down. To determine how much to sell to create a 60% stock allocation once again, begin with your total portfolio value, or $125,000. Multiply $125,000 by 0.60 (or 60%), and this will tell you what 60% of $125,000 is. In this case, it would be $75,000. Since you currently have $80,000 in stock, you would need to sell $5,000 to re-balance your portfolio. Seeing your stock allocation rise beyond your target amount can be an excellent reason to sell. The question is, how do you determine which stock to sell (assuming you have more than one)? In this case, you have a few options. The first is to sell the stock that is most overvalued. Conversely, you can also sell a stock that has lost money in order to benefit from tax loss harvesting. You can also consider looking to your biggest winners, and consider selling 50% of a winning stock as a way to lock-in your profits. It may be tempting to sell a stock that has been flat over the course the year for re-balancing purposes, and move that money into a winning stock that may or may not be overvalued. Be very cautious with this  If the stock that remained flat is still undervalued, or is still a good investment according to whatever means you used to analyze it, hold that stock unless you have an alternative with a better risk/reward profile. It is not uncommon for the market to take a long period to recognize the value of a particular company. Try to avoid selling stocks simply because they have lost value. While it may be tempting to sell a stock after it has lost 10% or 15%, a selling decision needs to be based not on what is happening to the price of the investment, but instead on changes to your initial reason for investing. Stocks can be incredibly volatile and can move due to factors not related to the individual business at all (like events in the global economy). Therefore, only sell when there has been a fundamental change to the business that refutes your original reason for investing (like the stock no longer being undervalued, or a major change in the competitive landscape).
Examine your asset allocation goals. Understand re-balancing. Calculate how much to sell. Sell the stock. Ensure you do not sell without good reason.