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Stocks soared in 2024
Congratulations! After taking a victory lap, it may be time to adjust your portfolio — because those heady returns likely threw your investment allocations out of whack.
The S&P 500, a stock index of the largest public U.S. companies by market capitalization, gained 23% in 2024. Cumulative S&P 500 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 lofty returns for stocks relative to muted ones for bonds may mean your portfolio holdings are out of that alignment, and riskier than you’d like. (U.S. bonds returned 1%, as measured by the Bloomberg U.S. Aggregate Bond Index.)
This makes it a good time for investors to rebalance their portfolios, financial advisors said.
Rebalancing brings a portfolio in line with investors’ long-term goals, ensuring they aren’t over or underweighted “inappropriately” in one particular asset class, said Ted Jenkin, a certified financial planner based in Atlanta and member of CNBC’s Financial Advisor Council.
“Every car should get an alignment check in the beginning of the year and this is nothing different with your investment portfolio,” said Jenkin, co-founder of oXYGen Financial.
How to rebalance your portfolio
Here’s a simple example of how portfolio rebalancing works, according to Lori Schock, director of the Securities and Exchange Commission Office of Investor Education and Advocacy.
Let’s say your initial portfolio has an 80/20 mix of stocks to bonds. After a year of market fluctuations, the allocation has changed to 85% stocks and 15% bonds. To return the mix to 80/20, you can consider selling 5% of your stocks and using the proceeds to buy more bonds, Schock said.
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“Set your targets 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 small, consider buying or selling to get your money back in balance,” she said. “Wall Street portfolio managers do this on a regular schedule. It’s a prudent investing exercise.”
A ‘huge gap in market fortunes’ in 2024
Rebalancing isn’t just about stocks versus bonds. Investors may also be holding other financial assets like cash.
A diversified portfolio also generally includes various categories within asset classes.
An investor’s stock bucket might have large-, mid- and small-cap stocks; value and growth stocks; U.S. and international stocks; and stocks within different sectors like technology, retail and construction, for example.
It’s important for investors to consider whether target weights to certain categories have also gotten out of whack, advisors said.
“There was a huge gap in market fortunes last year,” Cox said. “Tech stocks blew most other sectors out of the water, and the U.S. ran away from 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-heavy stock index, swelled almost 29%.
Non-U.S. stocks “continued to underperform,” returning about 5% last year, according to experts in Vanguard’s Investment Advisory Research Center.
“Right now, I think it’s smart to review your tech investments and think about taking some profits,” Cox said. “Tech 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 at their disposal, which can make the exercise simple if investors know their risk tolerance and investment time frames, Jenkin said.
Additionally, investors may have mutual funds or exchange-traded funds whereby professional money managers do the regular rebalancing for them, such as within target-date funds.
When rebalancing, it’s also important to consider tax implications, advisors said.
Investors with taxable accounts might trigger “unnecessary” short- or long-term capital gains taxes if they sell securities to rebalance, Jenkin said. Retirement investors with 401(k) plans and individual retirement accounts generally don’t need to consider such tax consequences, however, he said.
