Mid-2024 is quickly approaching, which means it might be time to trim some of the biggest winners in your portfolio. It’s been a strong year for the S&P 500, which is up nearly 12% so far. Information technology and communications services accounted for a sizeable share of the rise, with both sectors expected to rise more than 20% in 2024. Make a deep impression. NVDA YTD predicts Nvidia’s 2024 results “If your stock is up so much year-to-date, how can you lose money? It’s prudent at this point,” said Blair duQuesnay, a certified financial planner and investment advisor at Ritholtz Wealth Management in New Orleans. express. She is also a member of CNBC’s Financial Advisory Board. “Rebalancing isn’t just about ‘selling everything,’ it could be about selling a small portion of the proceeds,” she adds. Portfolio rebalancing may be worth doing on an annual basis, and it involves ensuring that your asset allocation continues to reflect your time horizon and risk preferences. Avoid an Unbalanced Portfolio Runaway appreciation in asset classes (as we’ve seen in large-cap tech stocks) can cause distortions in your portfolio. These highly appreciating positions can change the risk profile of your portfolio, especially if it’s been a long time since you last rebalanced. A 2023 analysis by Morningstar portfolio strategist Amy Arnott showed that a balanced portfolio with an initial 60%/40% allocation to stocks and bonds would lose 20% to 20% if investors don’t rebalance within five years. Become about a 70%/30% mixture. Furthermore, Arnott found that without rebalancing after five years, a portfolio with 20% growth and 20% value would become an allocation of about 30%/22%, respectively. Roger Arriaga-Diaz, global head of portfolio construction at Vanguard Group, said that while revisiting asset portfolios may make sense on paper, it’s difficult for investors to psychologically overcome the tendency to let their investments drift. “We’ve been riding on that good performance and we’d like to see balances continue to grow, but we have to remember that whatever the allocation is, it’s going to get riskier,” he said. “Last year, equities fared far better than fixed income. Now it’s time to rebalance.” Redeployment to other corners of the market Proceeds from trimming positions in highly appreciating stocks could be used to shore up fixed income, Arriaga-Diaz said. Income Allocation – With interest rates now rising, it may be easier for investors to take this step. He added that long-term investors can achieve attractive yields in fixed income markets without taking on too much risk. “What you want is true diversification: Treasuries and medium- to long-term duration,” Arriaga-Diaz said. “You don’t have to work for yield.” Bonds with longer duration have higher price sensitivity to interest rate fluctuations. They tend to be longer term issues. In an environment where the Federal Reserve begins to cut interest rates, prices for intermediate- and long-term bonds are likely to rise, which will help increase portfolio value. Bond yields have an inverse relationship with prices. Investors can take advantage of this corner of the market by buying individual stocks, but there are also exchange-traded funds that offer diversification at relatively low prices. The Vanguard Total Bond Market ETF (BND) has a 30-day SEC yield of 4.7%, and the iShares Core US Aggregate Bond ETF (AGG) has a 30-day SEC yield of 4.71%. The expense ratio of both funds is only 0.03%, and the duration is approximately six years. On the equity side, a rebalancing from growth to value and from large-cap to small-cap stocks may also make sense, Arriaga-Diaz added. Small-cap stocks lag the broader market, with the Russell 2000 rising just 1.5% through 2024. high. Products in this space include the Dimensional US Small Cap ETF (DFAS), which has a year-to-date total return of 1% and an expense ratio of 0.26%, according to Morningstar. There’s also Vanguard’s small-cap ETF (VB), which has a return of 2.4% in 2024 and an expense ratio of 0.05%. Manage the tax hit Cutbacks A significantly appreciated position in a portfolio held in a taxable account may come with a capital gains hit. However, there are several ways to control the effects. One potential method of tax relief is to use realized losses to offset these capital gains. Tax loss harvesting is a fundamental strategy in investment planning that involves pruning losing positions and using those losses to offset those taxable capital gains. When losses exceed capital gains in a year, investors can offset up to $3,000 of the loss against ordinary income and then carry forward the remainder. Investors can also work with financial advisors and accountants to reduce overweight positions by donating low-basis, highly appreciating stocks directly to charity. Typically, if these assets are sold, they will be subject to the heaviest capital gains taxes. Taxpayers who itemize deductions on their return—meaning their itemized deductions exceed the 2024 standard deduction of $29,200 for joint filers or $146,000 for singles—can claim charity Donation tax deduction. Investors can also donate some of their shares to donor-advised funds. This allows donors to take charitable deductions upfront and then distribute charitable gifts from the account over time.
