How to rebalance your portfolio after lofty stock returns in 2024

Stocks soared in 2024.

Congratulations! After taking a victory lap, it may be time to adjust your portfolio — because those heady returns likely threw your investment allocations out of whack.

The S&P 500, a stock index of the largest public U.S. companies by market capitalization, gained 23% in 2024. Cumulative S&P 500 returns over the past two years (53%) were the best since 1997 and 1998.

Long-term investors generally have a target allocation of stocks to bonds — say, 60% stocks and 40% bonds. But lofty returns for stocks relative to muted ones for bonds may mean your portfolio holdings are out of that alignment, and riskier than you’d like. (U.S. bonds returned 1%, as measured by the Bloomberg U.S. Aggregate Bond Index.)

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

Rebalancing brings a portfolio in line with investors’ long-term goals, ensuring they aren’t over or underweighted “inappropriately” in one particular asset class, said Ted Jenkin, a certified financial planner based in Atlanta and member of CNBC’s Financial Advisor Council.

“Every car should get an alignment check in the beginning of the year and this is nothing different with your investment portfolio,” said 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.

Let’s say your initial portfolio has an 80/20 mix of stocks to bonds. After a year of market fluctuations, the allocation has changed to 85% stocks and 15% bonds. To return the mix to 80/20, you can consider selling 5% of your stocks and using the proceeds to buy more bonds, Schock said.

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“Set your targets for each investment — how much you’d need to grow your money to be satisfied, and how heavy each investment should be relative to the rest of your portfolio,” said Callie Cox, chief market strategist at Ritholtz Wealth Management.

“If the allocation gets too big or small, consider buying or selling to get your money back in balance,” she said. “Wall Street portfolio managers do this on a regular schedule. It’s a prudent investing exercise.”

Rebalancing isn’t just about stocks versus bonds. Investors may also be holding other financial assets like cash.

A diversified portfolio also generally includes various categories within asset classes.

An investor’s stock bucket might have large-, mid- and small-cap stocks; value and growth stocks; U.S. and international stocks; and stocks within different sectors like technology, retail and construction, for example.

It’s important for investors to consider whether target weights to certain categories have also…