How to Rebalance Your Portfolio After High Stock Returns in 2024

In 2024, shares soared.

Congratulations! After you’ve taken a victory lap, it may be time to adjust your portfolio, because those heady returns have likely thrown your investment allocations into disarray.

The S&P500a stock index of the largest publicly traded American companies measured by market capitalization, rose 23% in 2024. The S&P 500’s cumulative returns over the past two years (53%) were the best since 1997 and 1998.

Long-term investors generally use a targeted allocation from equities to bonds, for example 60% equities and 40% bonds. But high returns for stocks compared to moderate returns for bonds could mean your portfolio investments are out of alignment riskier than you would like. (US bonds returned 1%as measured by the Bloomberg US Aggregate Bond Index.)

This makes it a good time for investors to rebalance their portfolios, financial advisors say.

Rebalancing aligns a portfolio with investors’ long-term goals, and ensures they aren’t “inappropriately” overweight or underweight a particular asset class, says Ted Jenkin, a certified financial planner based in Atlanta and a member of the Financial Advisor Council of CNBC.

“Every car should get an alignment check at the beginning of the year and your investment portfolio is no different,” says Jenkin, co-founder of oXYGen Financial.

Here’s a simple example of how portfolio rebalancing works: according to Lori Schock, director of the Securities and Exchange Commission Office of Investor Education and Advocacy.

Suppose your initial portfolio contains an 80/20 mix of stocks and bonds. After a year of market fluctuations, the allocation has been changed to 85% equities and 15% bonds. To get the mix back to 80/20, consider selling 5% of your shares and using 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 relative to the rest of your portfolio,” says Callie Cox, chief market strategist at Ritholtz Wealth Management.

“If the allocation becomes too big or too small, consider buying or selling to rebalance your money,” she said. “Wall Street portfolio managers do this regularly. It’s a sensible investment exercise.”

Rebalancing is not just about stocks versus bonds. Investors can also hold other financial assets, such as cash.

A diversified portfolio also typically includes different categories within asset classes.

An investor’s stock segment can consist of large-, mid- and small-cap stocks; value and growth stocks; US and international equities; and shares within different sectors, such as technology, retail and construction.

It’s important for investors to consider whether target weights for certain categories have also gotten out of control, advisers said.

“Last year there was a huge gap in market fortunes,” Cox said. “Tech stocks blew most other sectors out of the water, and the US fled from global markets.”

The so-called “Magnificent 7” mega-cap technology stocks – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla – accounted for more than half of the S&P 500’s total gains in 2024. The Nasdaq, a technology stock index, rose by almost 29%.

Non-US stocks continued to “underperform”, returning around 5% last year. according to experts at Vanguard’s Investment Advisory Research Center.

“At this point, I think it’s smart to reconsider your technology investments and think about taking some profits,” Cox said. “Technology rules our lives, but not always our wallets.”

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 timeframes, Jenkin said.

Additionally, investors may have mutual funds or exchange-traded funds where professional money managers do the regular rebalancing for them, for example within target date funds.

When rebalancing, it’s also important to consider the tax implications, advisers said.

Investors with taxable accounts could trigger “unnecessary” short- or long-term capital gains taxes when they sell securities to rebalance, Jenkin said. However, retirement investors with 401(k) plans and individual retirement accounts generally don’t have to consider such tax consequences, he said.