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Stocks It rose in 2024.
Congratulations! After victory, it may be time to adjust your investment portfolio – because those big returns will likely send your investment allocations spiraling out of control.
the Standard & Poor's 500the stock index of the largest public U.S. companies by market capitalization, rose 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 typically have a target allocation of stocks to bonds—for example, 60% stocks and 40% bonds. But the high returns of stocks compared to the muted returns of bonds may mean that your portfolio holdings are out of this alignment, and More dangerous than you want. (US bonds 1% returnedas measured by the Bloomberg US Aggregate Bond Index.)
Financial advisors said this makes it a good time for investors to rebalance their portfolios.
Ted Jenkin, an Atlanta-based certified financial planner and CNBC member, said rebalancing brings the portfolio in line with investors' long-term goals, ensuring they're not “unduly” overweight or underweight in a particular asset class. Financial Advisory Board.
“Every car should have an alignment check at the beginning of the year, and this is no different for 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 assume your initial portfolio has an 80/20 mix of stocks to bonds. After a year of market volatility, the allocation changed to 85% stocks and 15% bonds. To bring the mix back to 80/20, you could consider selling 5% of your stocks and using the proceeds to buy more bonds, Schock said.
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“Determine your goals for each investment — how much you will need to grow your money until you are satisfied, and how heavy each investment is compared to the rest of your portfolio,” said Callie Cox, chief market strategist at Ritholtz Wealth Management.
“If the allocation becomes too large or too small, consider buying or selling to bring your funds back into balance,” she said. “Portfolio managers on Wall Street do this on a regular schedule. It's a wise investment practice.”
“A huge gap in market fortunes” in 2024
Rebalancing isn't 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 stock portfolio may contain large-cap, mid-cap and small-cap stocks; Value and growth stocks; US and international stocks. And stocks in different sectors such as technology, retail and construction, for example.
Advisers said it was important for investors to consider whether target weights for certain categories had gotten out of control as well.
“There was a big gap in market fortunes last year,” Cox said. “Technology stocks have overwhelmed most other sectors, and the US has fled global markets.”
what is called “Brilliant 7“Giant tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, Tesla — It represents more than half of the S&P 500's total gain in 2024. The Nasdaq, an index of technology-heavy stocks, swelled by about 29%.
Non-US stocks continued their weak performance, 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 consider taking some profits,” Cox said. “Technology rules our lives, but it doesn't always rule our portfolios.”
Don't forget taxes
Investors in 401(k) plans may have automatic rebalancing tools at their disposal, which can make the practice simple if investors know their risk tolerances and investment time frames, Jenkin said.
In addition, investors may have mutual funds or exchange-traded funds for which professional money managers regularly rebalance, such as in target-date funds.
When rebalancing, it is also important to consider the tax implications, advisors said.
Investors with taxable accounts may be charged “unnecessary” taxes on short- or long-term capital gains if they sell securities to rebalance, Jenkin said. Retired investors with 401(k) plans and individual retirement accounts generally don't need to consider such tax consequences, he said.
