The middle of 2024 is upon us, and that means it might be time to prune back some of the biggest winners in your portfolio. It has been a strong year for the S & P 500 , which is carrying a nearly 12% gain thus far. Information technology and communication services have been responsible for a sizeable chunk of the advance, with both sectors jumping more than 20% in 2024. In particular, Nvidia has soared (again) this year, sporting a gain of 145%, which can leave investors reluctant to trim positions that have appreciated so much. NVDA YTD line Nvidia’s performance in 2024 “How can you lose if you have shares that are up that much year to date? It’s prudent at this point,” said Blair duQuesnay, certified financial planner and investment advisor at Ritholtz Wealth Management in New Orleans. She is also a member of CNBC’s Financial Advisor Council . “Rebalancing isn’t just ‘sell everything,’ it could be as much as selling a small portion of the gains,” she added. Portfolio rebalancing, a move that might be worthwhile once a year, involves ensuring that your asset allocation continues to reflect your time horizon and risk appetite. Avoiding a lopsided portfolio Runaway appreciation in an asset class – as we’re seeing in large-cap tech stocks – can result in distortions within your portfolio. Those highly appreciated positions can change the risk profile of your portfolio, particularly 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 that started out with a 60%/40% allocation toward stocks and bonds would have turned into a roughly 70%/30% blend if the investor went five years without rebalancing. Further, a portfolio with an asset mix of 20% in growth and 20% in value would have turned into an allocation of about 30%/22%, respectively, if five years lapsed without a rebalance, Arnott found. Even though revisiting the asset mix may make sense on paper, it’s difficult for investors to psychologically overcome the tendency to just let their investments coast, said Roger Aliaga-Diaz, global head of portfolio construction at Vanguard. “We’ve been riding on this good performance and we want to see the balances continue increasing, but we have to keep in mind that whatever the allocation is, it’s drifting toward more risky,” he said. “Equities have outperformed fixed income by so much over the last year. It’s time to rebalance.” Redeploying to other corners of the market Proceeds from trimming highly appreciated positions in stocks can go toward shoring up your fixed income allocation – a step that may be easier for investors to make with interest rates now being higher, said Aliaga-Diaz. Investors with long time horizons won’t need to take much risk to earn an attractive yield in the fixed income market, he added. “What you want is true diversification: Treasurys and intermediate to long-term duration,” Aliaga-Diaz said. “You don’t need to stretch for yield.” Bonds with greater duration have more price sensitivity to fluctuations in interest rates. They tend to be issues with longer maturities. In an environment when the Federal Reserve begins cutting interest rates, intermediate- and longer-dated bonds could see their prices rise, which would help boost portfolio values. Bond yields and prices have an inverse relationship. Investors can tap that corner of the market by purchasing individual issues, but there are also exchange-traded funds that can offer diversification at a relatively low price. The Vanguard Total Bond Market ETF (BND) has a 30-day SEC yield of 4.7% and the iShares Core U.S. Aggregate Bond ETF (AGG) has a 30-day SEC yield of 4.71%. Both funds carry a tiny expense ratio of 0.03%, and they both have a duration of roughly six years. On the equities side, it might also make sense to rebalance out of growth and into value, as well as out of large cap names and into small cap, Aliaga-Diaz added. Small caps have lagged the wider market, with the Russell 2000 only up 1.5% in 2024. But the category could benefit once interest rates come down, as higher rates make it more costly for smaller companies to take on additional debt or refinance. Offerings in that corner include the Dimensional U.S. Small Cap ETF (DFAS) , which has a total return of 1% year to date and an expense ratio of 0.26%, according to Morningstar. There is also Vanguard’s Small-Cap ETF (VB) , which has a 2024 return of 2.4% and an expense ratio of 0.05%. Managing the tax hit Trimming heavily appreciated positions in a portfolio that’s held in a taxable account may come with a capital gains hit. However, there are a couple of ways to manage the impact. One potential way to mitigate the tax is to use realized losses to offset those capital gains. Tax loss harvesting, a bread-and-butter strategy in investment planning, involves pruning losing positions and using these losses to counteract those taxable capital gains. In a year when losses exceed capital gains, investors can apply up to $3,000 of those losses to offset ordinary income and then carry over the remainder. Investors can also work with a financial advisor and accountant to thin out overweight positions by making a direct donation of low-basis, highly appreciated stock to charity. Normally, these holdings would be the ones subject to the heftiest capital gains taxes if they were sold. Taxpayers who itemize deductions on their returns – meaning that they have itemized deductions in excess of the standard deduction of $29,200 for joint filers in 2024 or $14,6000 for singles – can claim the charitable giving tax break. Investors can also give some of these holdings to a donor-advised fund. This allows the donor to collect a charitable deduction up front and then spread out charitable grants made from the account over time.
