As 2024 comes to a close, investors are reflecting on substantial stock market gains and considering adjustments to their portfolios. The S&P 500 stock index surged by 23%, while the tech-heavy Nasdaq soared nearly 29%. However, fluctuations in market conditions have changed the allocation of many portfolios, prompting experts to emphasize the importance of rebalancing.
Investors' stock buckets typically include a diverse range of holdings, such as large-, mid-, and small-cap stocks, value and growth stocks, as well as U.S. and international equities across various sectors. Following a year of significant market fluctuations, many portfolios now reflect an allocation that is heavily weighted towards stocks—approximately 85% stocks and 15% bonds. This shift highlights the necessity of reviewing investment strategies to ensure alignment with long-term goals.
For instance, a typical long-term investor may aim for a target allocation of 60% stocks and 40% bonds. If an initial portfolio was structured with an 80/20 mix of stocks to bonds, returning to this balance may require selling a portion of stock investments. Specifically, one strategy could involve selling 5% of stocks and using the proceeds to purchase additional bonds. This method aids in preventing overexposure to any single asset class, particularly in light of the recent growth in tech stocks.
The performance of the so-called "Magnificent 7" megacap tech stocks—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla—was particularly noteworthy in 2024. These companies collectively accounted for over half of the total gain in the S&P 500. However, Callie Cox, chief market strategist at Ritholtz Wealth Management, advises caution regarding tech investments.
"Right now, I think it's smart to review your tech investments and think about taking some profits," – Callie Cox
Investors should be aware that selling securities to rebalance portfolios in taxable accounts could trigger unnecessary short- or long-term capital gains taxes. This aspect can complicate the rebalancing process and may deter some investors from making necessary adjustments.
In addition to individual portfolios, those enrolled in 401(k) plans might have access to automatic rebalancing tools. These tools can be valuable for maintaining consistent asset allocation without the burden of manual adjustments. However, as Lori Schock points out, it remains essential to monitor one’s investments regularly.
"Every car should get an alignment check in the beginning of the year and this is nothing different with your investment portfolio," – Ted Jenkin
While U.S. stocks have enjoyed a strong performance, non-U.S. stocks have struggled to keep pace, returning only about 5% last year. Investors should take this underperformance into account while evaluating their global investment strategies.
As portfolios become more concentrated in certain sectors or asset classes due to recent gains, it becomes increasingly important to reassess each investment's role within the overall strategy. Setting clear targets for each investment can help investors determine how much growth is necessary for satisfaction.
"Set your targets for each investment — how much you'd need to grow your money to be satisfied, and how heavy each investment should be relative to the rest of your portfolio," – Callie Cox
The need for rebalancing is underscored by the vast differences in market performances observed throughout the year.
"There was a huge gap in market fortunes last year," – Callie Cox
As investors look ahead, they must consider how best to align their portfolios with their long-term financial goals. Rebalancing not only helps manage risk but also ensures that no single asset class dominates one's investment strategy.
Leave a Reply