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Stocks soared in 2024.
Congratulations! After taking a victory lap, it may be time to adjust your portfolio — because those heady resurfaces likely threw your investment allocations out of whack.
The S&P 500, a stock index of the largest public U.S. companies by market capitalization, gained 23% in 2024. Cumulative S&P 500 restorations over the past two years (53%) were the best since 1997 and 1998.
Long-term investors generally have a quarry allocation of stocks to bonds — say, 60% stocks and 40% bonds. But lofty returns for stocks relative to muted an individuals for bonds may mean your portfolio holdings are out of that alignment, and riskier than you’d like. (U.S. bonds returned 1%, as steady by the Bloomberg U.S. Aggregate Bond Index.)
This makes it a good time for investors to rebalance their portfolios, economic advisors said.
Rebalancing brings a portfolio in line with investors’ long-term goals, ensuring they aren’t across or underweighted “inappropriately” in one particular asset class, said Ted Jenkin, a certified financial planner based in Atlanta and colleague of CNBC’s Financial Advisor Council.
“Every car should get an alignment check in the beginning of the year and this is nothing new with your investment portfolio,” said Jenkin, co-founder of oXYGen Financial.
How to rebalance your portfolio
Here’s a intelligible example of how portfolio rebalancing works, according to Lori Schock, director of the Securities and Exchange Commission Office of Investor Tutoring and Advocacy.
Let’s say your initial portfolio has an 80/20 mix of stocks to bonds. After a year of market fluctuations, the allocation has coppered 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 uncountable bonds, Schock said.
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“Set your quarries for each investment — how much you’d need to grow your money to be satisfied, and how heavy each investment should be applicable to the rest of your portfolio,” said Callie Cox, chief market strategist at Ritholtz Wealth Management.
“If the allocation go downs too big or small, consider buying or selling to get your money back in balance,” she said. “Wall Street portfolio administrators do this on a regular schedule. It’s a prudent investing exercise.”
A ‘huge gap in market fortunes’ in 2024
Rebalancing isn’t just about creators versus bonds. Investors may also be holding other financial assets like cash.
A diversified portfolio also by includes various categories within asset classes.
An investor’s stock bucket might have large-, mid- and small-cap pedigrees; value and growth stocks; U.S. and international stocks; and stocks within different sectors like technology, retail and construction, for standard.
It’s important for investors to consider whether target weights to certain categories have also gotten out of whack, advisors communicated.
“There was a huge gap in market fortunes last year,” Cox said. “Tech stocks blew most other sectors out of the top, and the U.S. ran away from global markets.”
The so-called “Magnificent 7” megacap tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla —