Rebalance your portfolio after years of market gains: top advisor
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The stock market’s impressive run in recent years may be fattening your portfolio, but it may also have thrown off the balance of your planned investment mix.
While AI stock valuations led to a decline in the market on Tuesday, major indexes are still doing well this year, supported by both AI-related and big tech stocks. Through Tuesday’s close, the S&P index was up about 15.1%. Both the Dow and Nasdaq posted double-digit gains of approximately 10.6% and 20.9%, respectively, for the year.
These jumps come on the heels of big returns in 2023 and 2024. In fact, the S&P is up nearly 90% since mid-October 2022. During this time, the Dow’s gain was about 61% and the Nasdaq’s roughly 126%. Some experts view the market as overpriced; This means they expect a correction at some point.
If you haven’t rebalanced your portfolio recently, now is the time, financial advisors say. Rebalancing restores your intended asset allocation, that is, how you divided your portfolio among stocks, bonds, and other assets.
“Investors should look at their risk exposure and consider the purpose of the money and then sell risky areas of their portfolios,” said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, ranked No. 14 on CNBC’s Financial Advisor 100 list this year.
“They may have too much equity and not enough safe assets,” Armstrong said.
Don’t let FOMO lead to a ‘dangerous posture’
Let’s say you created a portfolio that contains 60% stocks and 40% bonds. If you’ve never rebalanced, it’s important Stock market returns may cause this ratio to remain close to 90:10 over time; a portfolio based mostly on stocks, with greater volatility and risk.
“I’m surprised to see how many people are afraid to reduce their equity exposure because they’re afraid of missing out on upside gains, and that’s a dangerous stance,” Armstrong said.
Basically, if you’re in retirement or near retirement, you don’t have time to recover from a prolonged down market like retirement savers in their 20s or 30s do.
“I wouldn’t let the fear of missing an opportunity blind me to the possibility [of] “It’s a bear market,” he said. “I’d like to have some money in a safe place.”
Armstrong also said it’s important to consider how a 20% or 30% drop in the value of your portfolio would affect your life or future.
“If this is going to matter, now is the time to act while prices are high,” Armstrong said. “Take some money off the table and put it in a safe place.”
How does rebalancing benefit investors?
Advisors say you need to have a rebalancing strategy and stick to it.
“Rebalancing takes the emotion out. It puts the client in a position where they have a systematic approach,” said Benjamin Offit, a Columbia, Maryland-based certified financial planner and senior wealth advisor and partner at Los Angeles Composition Wealth. “This allows them to callously sell high and buy low.”
Rebalancing also allows you to benefit from gains from better-performing investments while paying lower prices for underperforming investments.
Note that if you sell stocks you held in a taxable account, gains from assets held for one year or less are taxable. regular income tax rates. Profits from assets held for more than one year are considered long-term gains and are subject to tax rates of 0%, 15% or 20%, depending on your income.
Being able to stick to a rebalancing strategy will help with tax planning, Offit said. If you rebalance before your positions get too far off target, you won’t incur a large capital gain, he said.
By contrast, allowing large increases in a particular position over time could make it harder to sell due to high built-in capital gains, which could mean a big tax bill, he said.
Many financial advisors recommend rebalancing your portfolio at least once a year, if not more often.
“I think a few times a year or so you look at your risk exposure and review what the target is for the money,” Armstrong said.
