Don’t Forget to Make This Crucial Investment Move in 2024

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You should rebalance your investment portfolio in 2024 — and every year. Here’s why it’s important to match investments to your risk level. 

You probably have a lot of tasks on your to-do list as a new year rolls around. But there’s one personal finance move that you absolutely need to make. It’s often overlooked, but if you don’t take care of it, you could really come to regret it.

Rebalancing your portfolio is crucial for investors

Rebalancing your portfolio is the one investment move everyone needs to make going into 2024. Rebalancing involves readjusting the holdings in your brokerage account to meet your current level of risk tolerance.

There are two reasons to do this:

Your risk tolerance changes over time. The closer you are to needing your money, the less risk you can afford to take on since you don’t have as much time to recover from potential losses.Your asset allocation changes over time as some investments overperform and some underperform. Your investments don’t grow at a uniform rate, so your portfolio can become misaligned with your investment goals if you don’t rebalance.

Unfortunately, many people skip out on rebalancing because they don’t realize they need to do it or aren’t sure how. That explains why 37% of baby boomers are more exposed to stocks than they should be, putting them at risk of facing really big losses they don’t have time to recover from — which could derail their retirement.

Why is rebalancing so important?

To understand why rebalancing is so important, let’s take a look at a simple example. Say you are 50. You’re getting reasonably close to retirement, but aren’t there yet, so you should still have a good portion of your money invested in the stock market. Experts recommend subtracting your age from 110 to find out how much. So about 60% of your money should be in the stock market, while most of the rest should be in bonds and perhaps a little bit in cash.

Now, let’s say for simplicity’s sake that you had $100,000 invested 10 years ago when you were 40 and you wanted 70% of your portfolio in stocks. At the time, here’s what your asset allocation would have looked like:

70% stocks ($70,000)30% bonds ($30,000)

Now, say you did pretty well with your stocks, but your bonds didn’t perform quite as well. Here’s what this could look like:

If you earned a 12% average annual return on stocks, you’d have $217,409.37 invested in them (assuming you didn’t add any extra money).If you earned a 6% average annual return on your bonds, you’d have $53,725.43 in bonds.

If you didn’t make any changes or add anything to your portfolio, your asset allocation would have drifted over time, so you’d have 79% of your money invested in the stock market right now when you should have just 60%.

And, even if you kept adding to your portfolio, unless you put much more of your additional contributions into bonds each year rather than stocks, you could be even more out of whack if your stock investments outperformed your bond investments by so much.

Ultimately, since your risk tolerance changes over time and some investments always end up performing better than others, it is essential you rebalance every year to get your stocks in alignment with your goals.

So, figure out what percentage of your money should be in the market based on risk tolerance (subtracting your age from 110 is a good start), then take a look at your current holdings and decide what assets you need to buy more of in order to make sure you have the right level of risk. Do this every year so you aren’t at risk of losing too much or earning returns that are too low.

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