Portfolio Rebalancing: Essential Guidance After a Strong Market Year

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The year 2024 has been nothing short of remarkable for the stock market, with the S&P 500, comprising the largest public U.S. companies, surging by an impressive 23%. Over the past two years, cumulative returns have reached an astonishing 53%, marking the best performance since the late 1990s. But before you pop the champagne and celebrate your returns at Extreme Investor Network, it’s crucial to consider a key strategy that could significantly enhance your investment journey: portfolio rebalancing.

Understanding the Importance of Rebalancing

Long-term investors often maintain a targeted asset allocation—commonly a 60/40 split of stocks to bonds. However, with stocks outperforming bonds significantly, as illustrated by the Bloomberg U.S. Aggregate Bond Index’s meager 1% return, many investors may find their portfolios misaligned with their risk tolerance and long-term financial goals. This is an opportune moment to reevaluate and rebalance your investments.

Ted Jenkin, a certified financial planner and co-founder of oXYGen Financial, articulates this concept perfectly, saying, “Just like you would get an alignment check for your car each year, your investment portfolio requires similar scrutiny.”

Rebalancing realigns your portfolio with your predetermined risk profile, ensuring no particular asset class is either excessively weighted or underequipped.

Hands-On Guide to Rebalancing Your Portfolio

Consider this simplified example of how rebalancing works, as shared by Lori Schock of the SEC’s Office of Investor Education and Advocacy. Imagine you start with an 80/20 stocks-to-bonds allocation. After a year of market activity, you might find that allocation has shifted to 85% stocks and 15% bonds. To rebalance, you could sell off 5% of your stocks to increase your bond holdings back to 20%.

Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, emphasizes the importance of setting specific targets for each investment. She advises, “Establish how much growth you need for satisfaction, and maintain balance across all your investments.” Wall Street portfolio managers regularly engage in this prudent practice; why shouldn’t you?

Looking Beyond Stocks and Bonds

While the focus often lies on the stock and bond sectors, effective rebalancing also requires a keen eye on a diversified portfolio. This includes an array of stocks—large-cap, mid-cap, small-cap, growth, value—alongside international equities. The dichotomy of market performance has been stark; major tech stocks—dubbed the "Magnificent 7" (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla)—have driven a significant share of S&P 500 gains while many other sectors lag.

Non-U.S. stocks have shown a substantially lower return of about 5% last year, making it vital for investors to reassess their geographic allocation. Cox advises, “Now might be the right time to review your tech holdings and take some profits.” Remember, while technology is interwoven into our daily lives, it doesn’t mean it should dominate your investment portfolio.

Consider the Tax Implications

Rebalancing isn’t just about finding the right mix of stocks and bonds; it’s also essential to consider the tax implications of your trades. Many 401(k) plans offer automated rebalancing features tailored to your risk profile, making this process streamlined. Furthermore, mutual funds and ETFs usually employ professional managers who manage rebalancing as part of their service.

However, for taxable accounts, selling securities to rebalance could trigger unwanted short- or long-term capital gains taxes. Yet, if you’re participating in tax-advantaged accounts like a 401(k) or IRA, you won’t need to worry about these ramifications.

Final Thoughts

As we continue to experience shifts in the market, regularly reviewing and rebalancing your portfolio can help you stay compliant with your long-term investment goals, align with your risk tolerance, and capitalize on new market opportunities. At Extreme Investor Network, we believe that a proactive approach to investing goes hand in hand with strategic planning.

Don’t let soaring returns cloud your judgment—take the time to ensure your investment portfolio is still working hard for you! Don’t hesitate to reach out to our financial experts for personalized insights as you navigate through an increasingly complex financial environment.

By following these strategies, you’ll not only safeguard your investments but also position yourself for consistent growth in the years to come. Happy investing!