The financial landscape in 2024 has been nothing short of exhilarating for investors, particularly those who have a stake in the stock market. The S&P 500 surged by a remarkable 23%, while the tech-heavy Nasdaq soared even higher with a 29% increase. These figures mark a significant turnaround, with cumulative returns over the past two years hitting 53%, the best performance since the late 90s. However, before investors start popping the champagne, it’s crucial to take a step back and reassess their portfolios.
With stocks performing so well, it’s all too easy for investment allocations to drift away from their intended targets. For instance, a typical long-term investor might aim for a 60% allocation in stocks and 40% in bonds. However, with the S&P 500’s impressive gains juxtaposed against the meager 1% return from U.S. bonds—according to the Bloomberg U.S. Aggregate Bond Index—many portfolios are likely more aggressive than investors initially intended. This misalignment can expose investors to risks they might not be prepared to handle.
Rebalancing is the name of the game. Ted Jenkin, a certified financial planner based in Atlanta, emphasizes the importance of aligning your investment portfolio with your long-term goals. “Every car should get an alignment check in the beginning of the year, and this is nothing different with your investment portfolio,” he asserts. The idea is straightforward: if your portfolio has shifted from an 80/20 mix of stocks to bonds to an 85/15 ratio after a year of market fluctuations, it’s time to sell some stocks and buy more bonds to get back to that target allocation.
Callie Cox, chief market strategist at Ritholtz Wealth Management, adds another layer to this conversation. She advocates for setting clear targets for each investment and regularly assessing whether those targets are being met. If one asset class starts to dominate your portfolio, it might be time to take a step back and consider rebalancing. “Wall Street portfolio managers do this on a regular schedule. It’s a prudent investing exercise,” she notes.
The market dynamics in 2024 have created a “huge gap in market fortunes,” as Cox puts it. The so-called “Magnificent 7” tech stocks—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla—accounted for over half of the S&P 500’s total gain. Meanwhile, non-U.S. stocks lagged behind, returning only about 5%. This disparity raises an essential question for investors: Is it time to review tech investments and perhaps take some profits? While technology undeniably plays a pivotal role in our lives, it doesn’t always need to dominate our portfolios.
Moreover, investors should be mindful of tax implications when rebalancing. Those with taxable accounts could face capital gains taxes when selling securities to adjust their allocations. However, retirement accounts like 401(k)s typically offer a tax-advantaged environment for such moves.
As the dust settles on a year of unprecedented stock gains, the call for prudent portfolio management rings louder than ever. The investment landscape may be flourishing, but a little caution can go a long way in ensuring that portfolios remain aligned with long-term objectives.
