Time to Rebalance Your Portfolio: Expert Advice for a Healthy Investment Mix
After a remarkable year in the stock market, it’s essential to reassess your investment portfolio to ensure it remains aligned with your long-term goals. The S&P 500’s 23% gain in 2024, combined with the cumulative returns of 53% over the past two years, may have thrown your investment allocations out of balance.
Rebalancing: A Crucial Step in Portfolio Management
Rebalancing brings your portfolio back in line with your target allocation, ensuring you’re not over- or under-invested in a particular asset class. This process helps mitigate risk and maximize returns. Financial advisors recommend rebalancing your portfolio regularly to maintain a healthy investment mix.
A Simple Example of Portfolio Rebalancing
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.
Setting Targets and Maintaining Balance
Set clear targets for each investment, considering how much you need to grow your money to meet your goals and how each investment should be weighted relative to the rest of your portfolio. If the allocation gets too big or small, consider buying or selling to get your money back in balance.
Diversification: The Key to a Healthy Portfolio
A diversified portfolio includes various categories within asset classes, such as large-, mid-, and small-cap stocks, value and growth stocks, U.S. and international stocks, and stocks within different sectors. It’s essential to review your target weights to certain categories and adjust as needed.
Tech Stocks: A Cautionary Tale
The “Magnificent 7” megacap tech stocks dominated the market in 2024, accounting for more than half of the S&P 500’s total gain. While tech stocks are essential, it’s crucial to review your tech investments and consider taking some profits to maintain a balanced portfolio.
Automated Rebalancing Tools and Tax Implications
Investors in 401(k) plans may have access to automatic rebalancing tools, making it easy to maintain a balanced portfolio. Additionally, mutual funds and exchange-traded funds often have professional money managers who rebalance regularly. When rebalancing, consider tax implications, as selling securities to rebalance may trigger unnecessary capital gains taxes.
Take Control of Your Portfolio Today
Don’t let market fluctuations throw your investment portfolio out of balance. Take the time to reassess your investments, set clear targets, and maintain a healthy mix of assets. By doing so, you’ll be better positioned to achieve your long-term financial goals.
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