Stocks Soared in 2024: Now It’s Time to Rebalance Your Portfolio
Congratulations on the impressive returns in 2024! However, those heady gains may have thrown your investment allocations out of whack. The S&P 500, a stock index of the largest public U.S. companies, gained 23% in 2024, making it a good time to rebalance your portfolio.
Rebalancing brings a portfolio in line with investors’ long-term goals, ensuring they aren’t over or underweighted in one particular asset class. The target allocation of stocks to bonds is typically 60% stocks and 40% bonds. However, the 1% return on U.S. bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, may mean your portfolio holdings are out of alignment.
Here’s a simple example of how portfolio rebalancing works. 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.
Rebalancing isn’t just about stocks versus bonds. Investors may also be holding other financial assets like cash, and it’s important to consider whether target weights to certain categories have also gotten out of whack. The “Magnificent 7” megacap tech stocks accounted for more than half of the S&P 500’s total gain in 2024, and investors may want to review their tech investments and consider taking some profits.
When rebalancing, it’s also important to consider tax implications. Investors with taxable accounts might trigger “unnecessary” short- or long-term capital gains taxes if they sell securities to rebalance. However, retirement investors with 401(k) plans and individual retirement accounts generally don’t need to consider such tax consequences.
Don’t forget to review your portfolio regularly and make adjustments as needed. Rebalancing is a prudent investing exercise that can help you achieve your long-term financial goals.