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A 17.4% Increase in Stock Funds Was Recorded in 2024

January 5, 2025
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Stocks had an exceptional run in 2024, leaving investors celebrating significant gains. However, those strong returns may have disrupted your portfolio's balance, making this an ideal time to reassess and realign your investments.

The S&P 500, an index that tracks the largest publicly traded U.S. companies by market capitalization, soared by 23% in 2024. Over the past two years, the cumulative gains for the index reached an impressive 53%, the best performance since the late 1990s. While these returns are remarkable, they could have shifted your portfolio allocations away from your long-term targets, especially if your strategy involves a mix of stocks and bonds.

For instance, many long-term investors aim for a 60/40 portfolio split between stocks and bonds. But with equities outpacing fixed-income returns—U.S. bonds yielded just 1% in 2024, according to the Bloomberg U.S. Aggregate Bond Index—you might find yourself holding a riskier portfolio than intended. Financial advisors recommend rebalancing to bring your investments back in line with your original goals.

Portfolio rebalancing ensures your investments align with your long-term objectives by preventing overexposure to any single asset class, explains Ted Jenkin, a certified financial planner and member of CNBC’s Financial Advisor Council. Comparing it to a car's alignment check, Jenkin notes that a portfolio should undergo similar scrutiny at the start of the year to maintain optimal performance.

Rebalancing involves adjusting your portfolio to restore its original allocation. Lori Schock, director of the SEC's Office of Investor Education and Advocacy, provides a straightforward example: Imagine your portfolio starts with an 80/20 allocation of stocks to bonds. After a year of strong equity performance, the mix shifts to 85% stocks and 15% bonds. To rebalance, you could sell 5% of your stocks and reinvest the proceeds into bonds, returning to the initial 80/20 split.

Callie Cox, chief market strategist at Ritholtz Wealth Management, advises investors to set specific targets for their investments. "Determine how much growth you need to achieve your financial goals and the relative weight of each asset within your portfolio," Cox says. If the balance deviates significantly, consider buying or selling to realign. This disciplined approach is common among professional portfolio managers and serves as a prudent investing exercise.

Rebalancing isn't limited to managing the ratio of stocks to bonds. It also applies to diversifying within asset classes. Your stock holdings might include a mix of large-, mid-, and small-cap equities, as well as value and growth stocks, domestic and international companies, and various sectors such as technology, retail, and construction.

Last year’s market movements highlighted the need for this broader evaluation. "There was a huge gap in market performance," says Cox. Technology stocks outperformed most other sectors, with the so-called "Magnificent 7" megacap tech companies—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla—accounting for over half of the S&P 500’s 2024 gains. Meanwhile, the Nasdaq, a tech-focused index, surged nearly 29%.

In contrast, international equities lagged behind, delivering an average return of just 5%, according to Vanguard’s Investment Advisory Research Center. Given this disparity, Cox suggests reviewing your tech holdings and considering taking some profits. "While technology plays a central role in our lives, it doesn't always dominate our portfolios," she adds.

Rebalancing can be straightforward for investors with 401(k) plans, as many offer automatic rebalancing tools. These features allow investors to maintain their preferred allocations with minimal effort, provided they have a clear understanding of their risk tolerance and time horizon. Similarly, mutual funds and exchange-traded funds (ETFs) managed by professionals often handle regular rebalancing on behalf of investors, particularly within target-date funds.

However, it’s essential to be mindful of tax implications when rebalancing, especially for those with taxable accounts. Selling assets to rebalance could trigger short- or long-term capital gains taxes, cautions Jenkin. This is less of a concern for retirement accounts like 401(k)s or IRAs, where transactions typically avoid immediate tax consequences.

As you take stock of your portfolio after a stellar year for equities, remember that rebalancing is more than just a mechanical exercise—it’s a strategy to manage risk and optimize returns. By realigning your investments to match your long-term objectives, you can ensure your portfolio is well-positioned for whatever the future holds.

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Cathy Hills
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