The legendary investor Warren Buffet summed up one of the main keys to profitable long term investment best when he said -

'Be fearful when others are greedy. Be greedy when others are fearful"

So how can you put this into practice, how can you systematically build this wisdom it into your investment strategy so that luck or judgement doesn't come in to it?

It's achieved through a process called rebalancing and is relatively easy to implement. Professional investment managers use this technique to maintain their clients' investment portfolios. Let's use an example portfolio in an imaginary situation to illustrate how it works.

Say you invest £10,000 and spread the money across a range of funds to suit your appetite for risk. Let's say it's invested as follows:

£2,000 - Gilts and Bonds £4,000 - UK Equity £2,000 - International Equity £2,000 - Emerging Markets Then over the next twelve months your portfolio values move around a bit with some mixed fortunes. Your portfolio now looks like this: £1,500 - Gilts and Bonds £4,300 - UK Equity £2,150 - International Equity £3,800 - Emerging Markets

Now normal investor mentality, which is wrong, would tell you to keep things how they are. If it isn't broke don't fix. All the equity investments have done well. Bonds have taken a hit but will surely come back. In fact you probably should have put a bit more into emerging markets and really made some cash. It's tempting to put some more in now isn't it? The long term prospects for emerging markets look good and there's no sign of any dip in the market.

In fact here's what you should do. The reason you invested the original amounts in the funds you did was because they suited your appetite for risk and the returns you wanted or needed. So you set up your portfolio to be invested as follows:

By looking at your portfolio this way you can see that you are holding a set of investments that are no longer in tune with your original strategy. So you are more exposed to emerging markets than you originally wanted to be and have less invested in bonds in proportion to your overall portfolio than perhaps you should have.

The way to get it 'back on track' and more in line with your original plan is to sell some of your investment in emerging markets and invest those gains in to bonds.

By doing this you will reposition your portfolio to the approximate proportions you originally wanted them set to. But guess what you just did by systematically and unemotionally making an investment decision?

By selling emerging markets investments, because they have gone up, and buying gilts and bonds, because they have gone down, you've just bought low and sold high.

Regardless of the amount you have invested, the investments you use or the sectors you wish to invest in, this principle can be applied to your investments at any time.

One key consideration is the cost of buying and selling. This will vary with different investments but should be taken into account before placing deals.

If you implement this strategy with your investments do also consider the tax implications of buying and selling on a regular basis. Of course if you can hold all of your funds within an ISA or Personal Pension account then you won't have to worry about any capital gains tax implications when selling investments.