Do I need to restructure my portfolio going into 2025?
Everyone is getting antsy with the New Year on its way.
At this point, it is coming up in a majority of client conversations. Everyone wants to know how to allocate funds after the election.
Most people are best served by investing in a broad basket of ETFs, allowing them to gain exposure to a slew of different asset classes and markets. This is so perfect for most because we just want to participate in the market.
We don’t want to time it and we don’t want to tactically adjust our allocations based on current events. As a matter of fact, the further you can remove yourself from your investments, the better.
I have written previously about how the S&P 500 outperformed the average retail investor over long periods by a large margin here.
It might seem that readjusting your allocation would be smart, but this is usually just based on gut feelings and is a great example of us falling victim to market timing and tactical investing.
Now, closing in on the year, there is a form of restructuring that may be appropriate.
The annual rebalance. Given the stellar performance of large-cap US stocks, your current allocation may look much different than it might have at the beginning of the year.
This is completely normal! That is what happens due to price fluctuations, but it is important to note that your current allocation may not be in line with your target allocation.
I recently viewed a portfolio that was targeted to have 34% in large-cap US equities and 20% in bonds, but it was nearly 40% large-caps and 15% in bonds!
With large-cap stocks performing so well, risk was built into the portfolio over the year. An 80/20 portfolio going to 85/15 is a completely different risk tolerance level.
Rebalancing your accounts on an annual basis or upon serious market turbulence such as during the COVID crash can allow you to ensure that your portfolio is allocated according to your time horizon and risk tolerance.
So, when someone asks whether it’s time to take some chips off the table or if it is time to change their portfolio allocation, I’d say the following:
“Outside of an annual rebalance to the target allocation that is aligned with your risk tolerance and time horizon, is there actually a need for changing strategy? Or are you letting the current environment cloud your judgment and you are trying to mask the fact that you want to make tactical adjustments and time the market?”