What to know before doing any year-end portfolio rebalancing

After a year of double-digit stock returns, it may be time to rebalance your portfolio, shifting the percentage of stocks, bonds, and other assets toward target allocations.

Investors choose each amount based on their risk tolerance and long-term goals. However, as the markets move, the weights may deviate from their initial preferences.

If a portfolio becomes too heavy on stocks, for example, it can put someone at additional risk during times of volatility, with the possibility of larger future losses.

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On the other hand, a portfolio that is too weighted in bonds can make it more difficult to obtain the returns necessary to achieve long-term goals.

But there are some things to consider before buying and selling realignment assets, experts say.

Here’s what investors need to know.

“Before you complete a year-end portfolio rebalance, review your financial plan and risk tolerance to help you determine your target asset allocation,” suggested Certified Financial Planner Jon Ulin, Managing Director of Ulin & Co. Wealth Management in Boca Raton, Florida.

Life events like a birthday, wedding, having children or retiring can trigger a change in risk tolerance and investment goals for the new year, he said.

Investors should also measure how much their portfolio allocations have drifted since their last review.

For example, a portfolio of 60% stocks and 40% bonds may be upgraded to 70% stocks and 30% bonds depending on market performance, Ulin said.

Although rebalancing involves buying and selling, it is still part of a disciplined long-term strategy, rather than “speculating with big bets” on individual stocks, cryptocurrencies and high-risk sectors. , did he declare.

Investors may also consider the tax impact, particularly when selling valued assets from a taxable portfolio.

While assets held for more than a year qualify for lower long-term capital gains rates, investments held for less time may be subject to regular taxes, known as short-term gains.

“If you are facing a short-term gain by selling a position, it’s a good idea to determine when that gain becomes long-term,” said Philip Rutterer, CFP and owner of Rutterer Planning in Nashville, Tennessee.

For example, if there are only a few days or weeks left before an asset breaks the one-year mark, it may be best to stop the sale, he said.

Another lesser-known tactic allows investors below certain income thresholds to sell a profitable asset, not pay long-term capital gains, and buy it back on a so-called “boost” basis, raising the price of the asset. buy at present value for lower taxes. in the future.

While the end of the year can be an opportunity to realign portfolio assets, many advisors opt for a strategy of continuous rebalancing.

“We don’t subscribe to a rebalancing theory once a year,” said Benjamin Offit, CFP based in Columbia, Md. And director at Offit Advisors, explaining how specific “triggers” can drive changes throughout the career. year.

For example, if a client’s target allocation is 10% small cap stocks and those assets rise to 12% or drop to 8% of the portfolio, it might be time to make some adjustments, a. he declared.