How to rebalance your portfolio after the high returns of stocks in 2024

Actions grew in 2024.

Congratulations! After a victory lap, it might be time to adjust your portfolio — because those heady returns have likely thrown your investment allocation out of whack.

The S&P 500the stock index of the largest US public companies by market capitalization, increased by 23% in 2024. The S&P 500’s combined return over the past two years (53%) was the best since 1997 and 1998.

Long-term investors typically have a target allocation of stocks to bonds — say 60% stocks and 40% bonds. But a high yield for stocks compared to a low yield for bonds may mean that your portfolio capital is outside of that match, and riskier than we would like. (US bonds returned 1%as measured by the Bloomberg US Aggregate Bond Index.)

According to financial advisors, this is a good time for investors to rebalance their portfolios.

Rebalancing aligns portfolios with investors’ long-term goals by ensuring they don’t have excessive or inappropriate weighting in one particular asset class, said Ted Jenkin, an Atlanta-based certified financial planner and CNBC contributor. Board of Financial Adviser.

“At the beginning of the year, every car has to be inspected, and it’s no different than your investment portfolio,” said Jenkin, co-founder of oXYGen Financial.

Here is a simple example of how portfolio rebalancing works, in accordance with Lori Schock, director of the Office of Investor Education and Advocacy at the Securities and Exchange Commission.

Let’s say your initial portfolio has an 80/20 mix of stocks and bonds. After a year of market volatility, the allocation changed to 85% stocks and 15% bonds. To get the mix back to 80/20, you could consider selling 5% of your stocks and use the proceeds to buy more bonds, Schock said.

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“Set your goals for each investment — how much you need to grow your money to be satisfied, and how heavy each investment should be compared to the rest of your portfolio,” said Kelly Cox, chief market strategist at Ritholtz Wealth Management.

“If the allocation gets too big or too small, consider buying or selling to get your money back into balance,” she said. “Wall Street portfolio managers do this regularly. It’s a smart investment.”

Rebalancing isn’t just about stocks vs. 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 portfolio may include large-, medium-, and small-cap stocks; stock value and growth; 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 weightings for certain categories have failed, advisers said.

“There was a big gap in market condition last year,” Cox said. “Tech stocks underperformed most other sectors and the U.S. fled global markets.”

So called “Wonderful 7” megacap tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — accounted for more than half of total S&P 500 growth in 2024. The Nasdaq, an index of high-tech stocks, is up nearly 29%.

Non-U.S. stocks “continued to underperform,” having gained about 5% in the past year, in accordance with experts from the Vanguard Investment Advisory Research Center.

“Right now, I think it’s prudent to reevaluate my technology investments and think about taking a profit,” Cox said. “Technology rules our lives, but it doesn’t always rule our portfolio.”

Investors in 401(k) plans can have automatic rebalancing tools at their disposal, which can make the exercise simple if investors know their risk tolerance and investment time frame, Jenkin said.

Alternatively, investors may have mutual funds or exchange-traded funds where professional money managers do regular rebalancing for them, such as in target-date funds.

Tax implications are also important to consider when rebalancing, advisers say.

Investors with taxable accounts can trigger “unnecessary” short-term or long-term capital gains taxes when they sell securities to rebalance, Jenkin said. Retirement investors with 401(k) plans and individual retirement accounts typically don’t need to consider such tax implications, however, he said.