Both the stock and bond markets have made major moves over the past two years. As a result, it’s likely that many investors have portfolios that are out of balance compared with their original asset allocations.
Even if you don’t believe this to be true with your own portfolio, it’s always worth taking a look at as the calendar turns to a new year. In addition to the performance of the individual components of your portfolio, other variables that may make reallocation appropriate include your age, investment objectives, account type and tax bracket.
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Here are four strategies to rebalance your portfolio in the new year.
Pare Back Your Winners, Boost Your Losers — or Cut Them Loose
Traditional portfolio rebalancing simply means returning your asset allocation to its original model. Imagine, for example, that you design a portfolio in line with your investment objectives that allocates 70% to stocks and 30% to bonds. If, for example, the stock market has had two consecutive years of 20%-plus returns, it’s likely that your stock allocation is now too heavy.
Perhaps your actual portfolio now sits with an allocation of 82% to stocks and just 18% to bonds. To rebalance, you could sell enough of your stocks to shrink that allocation back down from 82% to 70%. In that case, you’d also have to buy more bonds so that your allocation rose to the desired 30% from the current 18%.
As money expert Ramit Sethi explained in an article, rebalancing your portfolio annually “enforces a strict ‘buy low, sell high’ strategy that can enhance returns over time.” By definition, if your portfolio is out of whack due to outperformance in one area, you’d be selling those assets at a high level. Simultaneously, you’d be reinvesting the money into the underperforming sectors of your allocation, or “buying low.”
Important to note, however, is that sometimes your portfolio might get out of whack due simply to underperformance. If your stock allocation falls from 80% to 65%, for example, it might be due in large part to a single stock losing half its value. In that scenario, while you should still buy stocks to boost your allocation, you might want to part with the single stock that is dragging down your portfolio — and might inflict even more damage in the future.
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Incorporate Your Tax-Advantaged Accounts
A difficulty investors face when rebalancing is taxes. If an investor sells an asset for a gain, they have to pay capital gains taxes.
To minimize that tax burden of reallocation, start by making moves in your tax-advantaged accounts, such as your IRA or 401(k). That way, any positions you sell will not trigger tax consequences.
Imagine, for example, that your IRA has $100,000 equally balanced between stocks and bonds. For simplicity’s sake, assume you also have a taxable investment account worth $100,000, but with an allocation of 80% stocks and 20% bonds. If you want to maintain an overall balance of 50% stocks and 50% bonds, you can adjust your IRA so that it holds 20% stocks and 80% bonds. Then you can maintain your overall blend without paying taxes on your rebalance.
Another option to rebalance, according to Vanguard, is to direct new purchases in taxable accounts into underweight categories.
Consider Your Overseas Allocation
One of the rebalances that many experts advise — but that many investors overlook — is allocating more assets to international stocks and bonds.
Andrew Molinet, senior portfolio strategist of the portfolio construction and strategy team at Janus Henderson, for example, said in an article that international stocks trade at a discount to U.S. stocks, even though there are some very high-quality companies overseas. He also noted that 82% of the world’s top-performing stocks over the past decade originated overseas, something that many investors may not even know.
Rebalancing with an international allocation can potentially reduce your portfolio’s volatility while increasing its return.
Integrate Your Required Minimum Distribution, If Applicable
If you will be taking a required minimum distribution (RMD) from your retirement account this year, that’s a perfect time to rebalance your portfolio, according to experts at Morningstar. By taking money out of your overallocated positions, you can rebalance your account without having to make any purchases. Meanwhile, you’ll also fulfill your RMD requirement.
For example, imagine that you had a $100,000 IRA with a 52% stock and 48% bond allocation, but you preferred a 50%-50% balance. If your RMD for the year were $4,000, you could simply take that out of your stock allocation. That would leave you with $48,000 in stocks and $48,000 in bonds, which would achieve your equal balance while taking out enough money to satisfy your RMD.
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This article originally appeared on GOBankingRates.com: 4 Ways To Rebalance Your Portfolio in 2025, According to Experts
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
