This move could help protect portfolios as stocks trade near their highs
There’s a party happening in stocks in 2024, and though investors may be reluctant, it could be time to think of taking a few chips off the table. Even as the S & P 500 and the Nasdaq Composite are cooling off this week after hitting fresh highs, they’re still enjoying a remarkable start to the year. Both indexes are up more than 6%, while the Dow Jones Industrial Average has advanced nearly 3%. The tech sector is driving a good chunk of the S & P 500’s gains, up 10% in 2024, followed by communication services – which includes Meta Platforms and Netflix – with a gain of 9% this year. .SPX YTD mountain S & P 500 in 2024 “Basically, we tell people that we want to buy low and sell high, and some people are like, ‘Why would I sell this? My portfolio has recovered [from 2022],'” said Marguerita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. She is also a member of CNBC’s Financial Advisor Council . “I tell people we’re not selling everything, but we need to give the portfolio the TLC it deserves – this is the fine-tuning of your portfolio,” she added. The downside of massive upside As much as investors may want to celebrate their winners and let them continue to ride, outsized gains have a way of throwing asset allocations out of whack. A portfolio that is allocated 60% toward stocks and 40% in bonds could look more like a 70/30 if it’s been five years since the last rebalancing, according to a 2023 analysis by Morningstar. And while that kind of distortion may not seem so bad when the market is on an upswing, it could result in a harder hit for investors during a downturn. “Markets never cease to correct after bull markets,” said Carla Adams, CFP and founder of Ametrine Wealth in Lake Orion, Michigan. “When you have a higher allocation to equities than you are typically comfortable with, you want to take those earnings off the table and put them into the fixed income portion of your portfolio, so that when a downturn happens, you don’t have more of your portfolio at risk than you are comfortable with,” she added. Rebalancing – that is, readjusting your portfolio’s weightings and ensuring they still reflect your time horizon and risk appetite – is a task that financial advisors say should happen every quarter or at least every year. If the market notches a record and it’s about time to rebalance, investors can start the process by assessing where the gains have been concentrated and considering whether those holdings still match with their long-term asset allocation and goals, said Sean Lovison, CFP and founder of Purpose Built in Moorestown, New Jersey. Investors who are reluctant to beef up exposure to underappreciated corners of the market can also try to dollar cost average into those positions. “Slowly add to the position you’re underweight in until you get back to balance,” said Lovison. “It helps psychologically.” Be tax aware: Investors may be wary of selling highly appreciated holdings within their taxable accounts, which can incur levies on capital gains. You can thin out those positions by directly donating the lowest cost basis, highly appreciated stock to charity – and if you itemize deductions on your tax return, you can claim the charitable giving deduction. Where to redeploy Financial advisors are turning to other less-appreciated corners of the market to redeploy any proceeds from selling highly appreciated positions. Cheng of Blue Ocean has been turning toward dividend payers, as well as small and midcap stocks. Indeed, the Russell 2000, the small-cap benchmark, is up less than 2% in 2024, but has rallied more than 6% in the past month. Cheng highlighted the First Trust Rising Dividend Achievers ETF (RDVY) , whose holdings include Pfizer and Micron Technology , and the First Trust SMID Cap Rising Dividend Achievers ETF (SDVY) . Holdings in SDVY include wood products company Boise Cascade and logistics services firm Matson . “It goes back to risk tolerance and time frame,” she said. “We want dividend payers that pay consistently – that’s considered financial stability.” Within tech, she likes the cybersecurity sector, “an area where there is spending even if we experience a recession.” It’s also been a good time to reassess fixed income exposure, as bonds will see price appreciation once the Federal Reserve eventually begins dialing back rates. Jon Ulin, CFP and CEO of Ulin & Co. Wealth Management in Boca Raton, Florida, likes high quality municipal bonds, and he expects to eventually pivot a greater percentage of portfolios toward intermediate to long duration bonds. “We are focused on reallocating funds to sectors or asset classes that offer diversification benefits and that have the potential for growth without the same level of volatility as tech stocks,” he said.
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