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 also might have thrown your intended investment mix off balance.

While artificial intelligence stock valuations spurred a market decline on Tuesday, the major indexes are still well up this year, propelled both by AI-related and big technology stocks. Through Tuesday’s close, the S&P index is up about 15.1%. Both the Dow and the Nasdaq have also posted double-digit gains for the year of roughly 10.6% and 20.9%, respectively.

Those jumps come on the heels of outsized returns in 2023 and 2024. In fact, the S&P has surged by about 90% since mid-October 2022. The Dow’s gain in that time is about 61% and the Nasdaq, roughly 126%. Some experts view the market as overpriced — meaning they expect a correction at some point.

Financial advisors say if you haven’t recently rebalanced your portfolio, now is the time. Rebalancing restores your intended asset allocation — that is, how you divvy up your portfolio among stocks, bonds and other assets.

Investors “should look at their risk exposure and review the purpose of the money and then sell down riskier areas of their portfolio,” said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, which is ranked No. 14 on CNBC’s Financial Advisor 100 list for this year.

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“They could have too much in equities and not enough in safe assets,” Armstrong said.

Say you built a portfolio with 60% stocks and 40% bonds. If you were never to rebalance, significant stock market returns could lead to that ratio standing at more like 90:10 over time — a portfolio based mostly on stocks, which come with more volatility and risk.

“I’ve been surprised by how many people are afraid to cut back their equity exposure because they’re afraid of missing out on upward gains, and that’s a dangerous posture,” Armstrong said.

Basically, if you are in retirement or near it, you don’t have the time to recover from a prolonged down market the way retirement savers in their 20s or 30s do.

“I wouldn’t let fear of missing out blind me to the possibility [of] a bear market,” he said. “I’d want to have some money in a safe place.”

Armstrong also said it’s important to think about how a 20% or 30% drop in the value of your portfolio would affect your life or your future.

“If it will matter, the time to take action is now while prices are high,” Armstrong said. “Take some money off the table and put it in a safe place.”

Advisors say you should have a rebalancing strategy and stick to it.

“Rebalancing takes the emotion out of it. It puts the client in a position where they have a systematic approach,” said Benjamin Offit, a certified financial planner based in Columbia, Maryland, and a senior wealth advisor and partner for Composition Wealth of Los Angeles. “That enables them to unemotionally sell high and buy low.”

Rebalancing also lets you profit off gains from outperforming investments while paying lower prices for underperforming ones.

Remember that if you sell stocks you hold in a taxable account, any gains on assets held for one year or less are subject to regular income tax rates. Profits on assets held longer than a year are considered long-term gains and face tax rates of 0%, 15% or 20%, depending on your income. 

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If you can stick to a rebalancing strategy, it helps with tax planning, Offit said. If you rebalance before your positions drift too far from their target, you won’t incur a huge capital gain, he said.

In contrast, allowing massive runups over time in a particular position can make it harder to sell due to high embedded capital gains, which can mean a large tax bill, he said. 

Many financial advisors recommend rebalancing your portfolio at least once a year, if not more often.

“I think a couple times a year or maybe more, look at your risk exposure and review what the goal is for the money,” Armstrong said.