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Stocks increased in 2024.
Congratulations! After your victory lap, it may be time to adjust your portfolio, as these stunning gains have likely shaken up your investment allocation.
The S&P500the stock index of the largest US public companies in terms of market capitalization, gained 23% in 2024. The S&P 500's total 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 – say 60% stocks and 40% bonds. However, high stock returns compared to weak bond returns may mean that your portfolio positions are out of alignment, and riskier than you would like. (American bonds returned 1%measured by the Bloomberg US Aggregate Bond Index.)
It's a good time for investors to rebalance their portfolios, financial advisers say.
Rebalancing aligns a portfolio with investors' long-term goals, ensuring they are not “inappropriately” overweight or underweight in one particular asset class, said Ted Jenkin, an Atlanta-based certified financial planner and member of the CNBC team Council of Financial Advisors.
“Every car should be inspected at the beginning of the year, and your investment portfolio is no different,” 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 Advisory Services.
Let's assume your initial portfolio consists of 80/20 stocks and bonds. After a year of market fluctuations, the allocation changed to 85% stocks and 15% bonds. To get back to 80/20, you might consider selling 5% of your stock and using the proceeds to buy more bonds, Schock said.
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“Set goals for each investment — how much you need to grow your money to be happy, and how large each investment should be relative 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 regain balance,” she said. “Wall Street portfolio managers do this regularly. This is prudent investing.”
'Huge gap in market fortunes' 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 portfolio may include large-, mid- and small-cap stocks; value and growth stocks; US and international stocks; and stocks in various sectors such as technology, retail and construction, for example.
It's important for investors to consider whether target weights for certain categories have also stopped working, advisers say.
“There was a huge difference in market fortunes last year,” Cox said. “Tech stocks unhinged most other sectors, and the U.S. fled global markets.”
The so-called “Magnificent 7“ Megacap tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — accounted for more than half total S&P 500 growth in 2024. The Nasdaq, a technology-enabled stock index, rose almost 29%.
Non-U.S. stocks “continued to underperform,” down around 5% last year, According to experts from the Vanguard Investment Advisory Research Center.
“Right now, I think it's wise to review technology investments and think about generating returns,” Cox said. “Technology rules our lives, but it doesn't always rule our wallets.”
Don't forget about taxes
Investors in 401(k) plans may have automatic rebalancing tools at their disposal, which can make this exercise easier if investors know their risk tolerance and investment time frame, Jenkin said.
Additionally, investors may own mutual funds or exchange-traded funds in which professional money managers regularly rebalance for them, such as target-date funds.
Advisers say tax implications also need to be considered when rebalancing.
Investors with taxable accounts could face an “unnecessary” short- or long-term capital gains tax if they sell securities to rebalance, Jenkin said. But he added that retired investors with 401(k) plans and individual retirement accounts generally don't have to consider such tax consequences.