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Shares increased in 2024.
congratulations! Once you’ve taken a victory lap, it might be time to adjust your portfolio — because those skyrocketing returns have likely thrown your investment allocations awry.
The S&P 500the stock index of the largest public US companies by market capitalization, gained 23% in 2024. The S&P 500’s cumulative returns over the past two years (53%) were the best since 1997 and 1998.
Long-term investors generally have a target allocation of stocks to bonds — say, 60% stocks and 40% bonds. But high stock returns relative to muted bond returns may mean your portfolio is out of line, and riskier than you’d like. (US bonds returned 1%measured by the Bloomberg US Aggregate Bond Index.)
This makes it a good time for investors to rebalance their portfolios, financial advisers said.
Rebalancing aligns a portfolio with an investor’s long-term goals, ensuring they are not “inappropriately” weighted in a particular asset class, said Ted Jenkin, an Atlanta-based certified financial planner and CNBC contributor. Financial Advisor Council.
“Every car should go through a compliance check at the beginning of the year and it’s no different with your investment portfolio,” said Jenkin, co-founder of oXYGen Financial.
How to rebalance your portfolio
Here is a simple example of how portfolio rebalancing works, according to Lori Schock, director of the Securities and Exchange Commission’s Office of Investor Education and Advocacy.
Let’s say your starting portfolio has an 80/20 mix of stocks and bonds. After a year of market fluctuations, the allocation changed to 85% stocks and 15% bonds. To get the mix back to 80/20, you could consider selling 5% of your shares and use the proceeds to buy new bonds, Schock said.
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“Set your goals for each investment — how much you’d need to grow your money to be satisfied and how heavy each investment should be relative to the rest of your portfolio,” said Callie Cox, chief market strategist at Ritholtz Wealth Management.
“If the allocation gets too big or too small, consider buying or selling to get your money back into balance,” she said. “Wall Street portfolio managers do this regularly. It’s a wise investment exercise.”
‘The Great Gap in Market Destiny’ in 2024
Rebalancing is not just about stocks versus bonds. Investors may also hold other financial assets such as cash.
A diversified portfolio also generally includes different categories within asset classes.
An investor’s group of stocks can have stocks of large, medium and small capitalization; stock value and growth; US and international stocks; and stocks within different sectors such as technology, retail and construction, for example.
It is important for investors to consider whether the target weights for certain categories are also disrupted, the advisers said.
“There was a big gap in market fortunes last year,” Cox said. “Tech stocks blew away most other sectors, and the US fled global markets.”
the so-called “Magnificent 7” megacap tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — accounted for more than half of the S&P 500’s total gain in 2024. The Nasdaq, a tech-rich stock index, is up nearly 29%.
Non-U.S. stocks “continued to underperform,” returning about 5% last year, according to experts at Vanguard’s Investment Advisory Research Center.
“Right now, I think it’s smart to review your technology investments and think about making some profit,” Cox said. “Technology rules our lives, but it doesn’t always rule our portfolios.”
Don’t forget about taxes
Investors in 401(k) plans may have automatic rebalancing tools available, which can make the exercise simple if investors know their risk tolerance and investment time frames, Jenkin said.
Additionally, investors may hold mutual funds or exchange-traded funds where professional money managers perform regular rebalancing for them, such as within target-date funds.
When rebalancing, it is also important to consider the tax implications, the advisers said.
Investors with taxable accounts could trigger “unnecessary” short-term or long-term capital gains taxes if they sell securities to rebalance, Jenkin said. However, retirement investors with 401(k) plans and individual retirement accounts generally don’t need to consider such tax consequences, he said.
