Why the timing is right to rebalance your portfolio

Nothing breeds confidence like recent success, and there’s no shortage of confident investors these days.

Two months ago on Jan.19, the S&P 500 hit an all-time high for the first time in two years. In the trading days since then, the benchmark has set new highs in nearly half of them.

Equities remain hot, momentum remains positive, and as a result, there’s a strong chance your portfolio is now meaningfully overweight stocks.

If you’re wondering, “Should I rebalance?” the answer is probably, “Yes.”

Most investors are familiar with the benefits of rebalancing but less disciplined when it comes to doing it. If you (or your adviser) have done the work to determine 80% equities, 15% bonds and 5% cash is your most appropriate allocation, then “letting things ride” when stocks grow to 88% would therefore be inappropriate.

Rebalancing effectively forces investors to buy low and sell high (who doesn’t want that?), but egos and emotions tend to get in the way of smart decisions. Case in point: If equities become a larger slice of your financial pie because stocks have rallied, it’s natural to feel like the uptrend will continue. When the opposite occurs, and stocks fall significantly, most people feel vulnerable and prefer to avoid increasing risk.

In both situations, it’s easy to convince yourself not to rebalance. Our advice: Don’t fall for that emotional cop-out. As long as your target allocation is sound, there is rarely a bad time to rebalance.

There is, however, more than one path to accomplish this. If you are subject to Required Minimum Distributions (RMD) from your retirement accounts, go ahead and satisfy those sooner rather than later. You’ll need to transfer the assets to a different account by year-end anyway, so why not sell stocks while the S&P is near all-time highs? If you owe state or federal taxes following your 2023 tax filing, you can use your IRA withdrawal toward that purpose.

If you make charitable donations either directly or into a Donor Advised Fund, it’s a great time to use highly appreciated stock for that purpose. Similar to RMD, the tendency is to wait until late in the year, but this rally creates an opportunity to check that box earlier than usual while reducing equity exposure in the process.

If you can, it might be beneficial to enter rebalancing trades in retirement accounts to avoid tax consequences, but the prospect of realizing taxable gains should not dissuade investors from rebalancing to their long-term targets.

If you are a younger investor or especially aggressive, your target allocation might be close to 100% stocks. In that case, consider rebalancing from one type of equities into another. This is often referred to as “rotation.”

Growth stocks and technology, specifically, have been the best performers and darlings of the stock market for the past 15 months. Perhaps that trend continues, but locking in some profits from those categories in favor of other equity flavors has merit. Small-cap stocks, equal-weighted index funds and higher-dividend payors all have lagged through that same time period and might be worth added exposure.

The rebalancing reminder is not meant to suggest the stock market is headed for a correction. The truth is, no one ever knows for sure. But smart investors will adhere to a disciplined approach regardless of their outlook.

There’s nothing wrong with being confident. But a dose of humility is another important ingredient to investment success. Even when rebalancing feels unnecessary, it usually proves to be the right move.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.