If you rode your Big Tech winners into the new year, now might be the time to consider whittling down a few of those overweight positions. The 2023 dominance of the “Magnificent Seven” stocks — Apple , Alphabet , Amazon , Meta Platforms , Microsoft , Nvidia and Tesla — carried the S & P 500 to a 24% gain for the year. The tech sector alone jumped 56% last year. .SPX 1Y mountain S & P 500 in the past 12 months A huge gain like that could distort investors’ asset allocation, making their equity holdings larger than they intended or more heavily skewed toward technology. That’s where rebalancing comes in. “Rebalancing is when you’re returning the portfolio to its target allocation,” said Blair duQuesnay, a certified financial planner and investment advisor at Ritholtz Wealth Management in New Orleans. “Either you’re selling the thing that just made you a lot of money, or you’re buying the thing that lost you money.” The issue with rebalancing this year is that investors might be reluctant to trim some of their holdings, especially with Nvidia up nearly 240% to end 2023 — and up another 11% already in 2024 — and Apple climbing 48% last year (and falling 3.7% so far in 2024). “It’s the only way to consistently buy low and sell high, but no one ever wants to do it,” duQuesnay said. Distortions over time A 60/40 portfolio — that is, one that’s allocated 60% toward stocks and 40% toward bonds — could be thrown out of proportion if an investor takes a “set it and forget it” approach to investing. A late 2023 analysis by Morningstar strategist Amy Arnott showed that a hypothetical 60/40 portfolio will skew closer to 70/30 if it has been five years since the last rebalancing. If it has been three years since the last rebalance, the 60/40 allocation could become a split of about 67/33, Arnott found. “A balanced portfolio — however an investor defines their own correct balance — if they haven’t rebalanced, it’s likely far more heavily weighted toward stocks and far riskier than it has been in quite some time,” said Barry Glassman, CFP and founder of Glassman Wealth Services in North Bethesda, Maryland. Boosting diversification For clients who are willing to part with some of those heavily appreciated positions, it might make sense to check out other corners of the market. Consider that the Russell 2000 , the small-cap benchmark, finished last year with a 15% gain — far short of the S & P 500’s blockbuster win. “Our most aggressive portfolio had a 12% small cap slice, which didn’t serve us well until the last four weeks of the year,” said Malcolm Ethridge, CFP and financial advisor with CIC Wealth in Rockville, Maryland. “But we maintain that position because eventually the Fed’s move to cut rates will benefit [the sector].” He noted that the iShares Russell 2000 ETF (IWM) is a good way to get broad exposure to the space. Similarly, CIC Wealth has kept its positioning in real estate, anticipating that the sector could see a bounce in a falling rate environment. On the tech side, Ethridge anticipates a reshuffling of large-cap names, noting Microsoft will likely stay on the top of the list, but names such as Adobe and Advanced Micro Devices could also benefit as artificial intelligence booms. AMD 1Y line AMD over the past 12 months “I think the AI narrative will continue this year and be just as strong as it was last year,” he added, expecting “a rotation away from companies that are overbought like Nvidia or that are no longer in favor, like Tesla.” There is also an opportunity for investors to add to their fixed income exposure. The Federal Reserve’s rate-hiking campaign made yields on an array of assets, ranging from Treasurys to money market funds, attractive. With the Federal Reserve penciling in three rate cuts this year, fixed income investors could benefit from price appreciation , as bond yields and prices move in opposite directions. “Investors who may have been holding less in bonds than they normally would have because rates were so low for so long can actually own bonds,” said duQuesnay. “Now the bonds can do more work because rates have normalized.” Ethridge, who bought six- and 12-month brokered certificates of deposit for clients in 2023, is going for longer-dated instruments these days. “We’re locking in for longer term,” he said, noting that he has been able to find 18- to 24-month brokered CDs offering more than 5% in annual percentage yield. When charity and rebalancing intersect Glassman noted that clients with overweight positions in one or two of the Magnificent Seven have been reluctant to take some of those chips off the table — and they are especially hesitant if they’re likely to take a big tax hit on the stocks’ runaway appreciation. However, there’s one way to reduce some of that exposure without incurring taxes: Consider a direct donation of appreciated stock to charity so that you cut your concentration. Taxpayers who itemize their tax deductions — that is, they have itemized deductions that exceed the standard deduction of $14,600 in 2024 if single, or $29,200 if married and filing jointly — may claim the charitable giving deduction. “If it makes sense to take some off the table, take the lowest basis stock and donate it to a donor-advised fund as a way to rebalance and have a tax benefit as well,” Glassman said. Donor-advised funds can receive a wide range of assets, and investors can collect a charitable deduction up front even if they spread out their donations from the account.
This story originally appeared on CNBC
