As we step into 2025 and reflect on the financial phenomena of 2024, it’s hard not to notice the substantial gains in the stock market. The S&P 500, representing the largest publicly traded companies in the United States, surged by an impressive 23% in 2024, contributing to a remarkable cumulative return of 53% over the past two years—the highest we’ve seen since the booming years of 1997 and 1998. While this exhilarating performance is cause for celebration, it is also a pivotal moment for investors to take stock of their portfolios and make crucial adjustments.
With such dynamic returns, it’s nearly inevitable that many investors’ financial allocations have strayed from their original intentions. A typical long-term investment strategy might suggest a balanced mix—often around 60% equities and 40% fixed-income securities. However, as we’ve seen, stocks have considerably outperformed bonds, which delivered a mere 1% return as shown by the Bloomberg U.S. Aggregate Bond Index. This disparity could have inadvertently left portfolios riskier than an investor might be comfortable with.
Financial professionals advocate for regular rebalancing to align portfolios with investors’ long-term objectives. Ted Jenkin, a certified financial planner and co-founder of oXYGen Financial, likens this process to a car maintenance checkup; just as cars require periodic alignments, so too do investment portfolios. Diving deeper into the mechanics of rebalancing can help illuminate the most effective strategies for correcting course.
Consider an illustrative scenario where an investor initially holds an 80/20 stock-to-bond allocation. A year marked by stock market exuberance may shift that allocation to 85% stocks and 15% bonds. To restore the balance, the investor might need to sell a portion of their stock holdings to reinvest in bonds, effectively reversing the shift caused by market movements. This proactive approach not only maintains the desired risk profile but also reinforces discipline in investment strategy.
Callie Cox from Ritholtz Wealth Management speaks to the importance of setting precise targets for each investment. By clearly defining how much growth is acceptable for satisfaction, investors can evaluate when to sell or reinvest, thereby maintaining a balanced portfolio. Drawing a clear line between the roles of stocks and bonds within your financial strategy is essential, especially in light of how different sectors perform variably across economic climates.
It’s important to remember that effective rebalancing goes beyond merely adjusting stocks and bonds. A diversified portfolio should encompass a variety of asset categories. Within the stock allocation, investors should consider diversity in terms of company size (large-cap, mid-cap, small-cap), investment styles (value vs. growth), and geographical exposure (domestic vs. international). This year’s market dynamics revealed a pronounced dominance of technology stocks, particularly the “Magnificent 7″—a group encompassing major players like Apple, Amazon, and Microsoft—which alone contributed to over half of the S&P 500’s gains in 2024.
Conversely, international equities struggled considerably, returning around 5%. This stark contrast calls for evaluation in technological investments to perhaps realize profits while maintaining a diversified perspective. Cox warns that, while tech companies command significant interest, their overpowering presence in portfolios may require reconsideration.
For those enrolled in 401(k) plans, leveraging automated rebalancing features could streamline the adjustment process, making it relatively straightforward as long as investors have a clear understanding of their risk tolerance and timelines for investing. Furthermore, mutual funds and exchange-traded funds often include built-in rebalancing mechanisms managed by professionals, alleviating some burden from individual investors.
However, utilizing these services isn’t without considerations. Tax implications can arise from selling assets to realign a portfolio, particularly for those with taxable accounts, which could trigger capital gains taxes. Conversely, assets held within retirement accounts typically avoid these consequences, allowing for more favorable reallocations.
As we absorb the invaluable lessons from a robust stock market in 2024, it’s apparent that keeping a finger on the pulse of your investment strategy is essential. The winds of the financial landscape are ever-changing, presenting opportunities and risks alike. By diligently rebalance portfolios and vigilantly monitor allocations, investors can fortify their financial future, ensuring that success from one year translates into a sustained pathway toward long-term investment goals.