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In 2024, stock prices skyrocketed.
Congratulations! After winning, it may be time to adjust your portfolio. This is because these dizzying returns can throw off your investment allocation.
The S&P 500, the largest stock index of publicly traded companies in the U.S. by market capitalization, rose 23% in 2024. The S&P 500’s cumulative return over the past two years (53%) was the highest since 1997 and 1998.
Long-term investors typically have a target allocation of stocks and bonds. For example, 60% stocks and 40% bonds. But high returns on stocks compared to dull returns on bonds can mean your portfolio holdings are out of alignment and riskier than you’d like. . (U.S. bonds returned 1%, according to the Bloomberg U.S. Aggregate Bond Index.)
For this reason, financial advisors say it’s a good time for investors to rebalance their portfolios.
Ted Jenkin, an Atlanta-based certified financial planner and member of the CNBC Financial Advisors Council, says rebalancing aligns a portfolio with an investor’s long-term goals and increases the “Appropriately,” he said, “so that they are neither overestimated nor underestimated.”
“Every car should have an alignment check at the beginning of the year, and investment portfolios are no exception,” 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’s Office of Investor Education and Advocacy.
Suppose your initial portfolio contains 80/20 stocks and bonds. After a year of market volatility, the allocation changed to 85% stocks and 15% bonds. Schock said that to get back to an 80-20 split, the company could consider selling 5% of its stock and using the proceeds to buy more bonds.
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“Set goals for each investment, how much your money needs to grow to meet it, and how each investment compares to the rest of your portfolio,” says Karrie Cox, chief market strategist at Ritholtz Wealth Management. “Does it have to be heavy?”
“If your allocation is too large or too small, consider buying or selling to rebalance your funds,” she said. “Wall Street portfolio managers do this regularly. It’s a smart investment move.”
“Big difference in market fate” in 2024
Rebalancing isn’t just about stocks and bonds. Investors may also hold other financial assets, such as cash.
A diversified portfolio also typically includes different categories within asset classes.
An investor’s stock bucket may include large-cap, mid-cap, and small-cap stocks. Value stocks and growth stocks. US and international stocks. For example, it also includes stocks from various sectors such as technology, retail, and construction.
Advisors say it’s important for investors to consider whether their target weights for specific categories are also out of line.
“There was a big gap in the fortunes of the market last year,” Cox said. “Tech stocks blew out most other sectors, and the U.S. ran away from global markets.”
Mega-cap tech stocks from the so-called “Magnificent Seven” – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla – accounted for more than half of the S&P 500’s gains in 2024. The Nasdaq, a tech-heavy stock index, swelled by nearly 29%.
Non-U.S. stocks “continue to underperform,” returning about 5% last year, according to experts at Vanguard Investment Advisors Research Center.
“At this point, I think it’s prudent to reevaluate technology investments and consider taking profits,” Cox said. “Technology dominates our lives, but it doesn’t necessarily dominate our portfolios.”
Don’t forget about taxes
Jenkin said investors in 401(k) plans may have automatic rebalancing tools at their disposal, which could be easier to implement if investors know their risk tolerance and investment horizon. He said that there is.
Additionally, investors hold mutual funds and exchange-traded funds, which professional money managers regularly rebalance with target-date funds.
Advisors say it’s also important to consider tax implications when rebalancing.
Jenkin said investors with taxable accounts who sell securities for rebalancing could be subject to “unnecessary” short-term or long-term capital gains taxes. But retiree investors with 401(k) plans and individual retirement accounts typically don’t have to consider such tax implications, he said.
