With 2024 halfway through, it may be time to liquidate some of the biggest gainers in your portfolio. The S&P 500 has had a strong year so far, up nearly 12%. Information technology and communication services have accounted for a good chunk of that gain, with both sectors expected to rise more than 20% in 2024. Notably, Nvidia has soared (again) this year, up 145%, so investors may be reluctant to liquidate positions that have risen significantly. NVDA’s Year-to-Date Line, Nvidia’s 2024 Performance “If you have a stock that’s risen this much year-to-date, you can’t afford to lose money. At this point, that’s the smart thing to do,” said Blair Duquesnay, a certified financial planner and investment adviser at Ritholtz Wealth Management in New Orleans. Duquesnay is also a member of CNBC’s Council of Financial Advisors. “Rebalancing doesn’t just mean ‘selling everything,’ it can also mean selling a small portion of your gains,” she added. Rebalancing your portfolio annually may be worthwhile, but this includes ensuring your asset allocation continues to reflect your investment time horizon and risk tolerance. Avoid a lopsided portfolio. Rapid rallies in asset classes, as seen with large tech stocks, can distort your portfolio. These overvalued positions can change your portfolio’s risk profile, especially if it’s been a long time since your last rebalance. A 2023 analysis by Morningstar portfolio strategist Amy Arnott showed that a balanced portfolio that started with a 60%/40% allocation to stocks and bonds would have turned into a roughly 70%/30% mix if the investor had not rebalanced for five years. Moreover, Arnott’s research showed that a portfolio with a 20% growth and 20% value mix would have turned into a roughly 30%/22% allocation, respectively, if five years had passed without rebalancing. While reassessing the asset mix may make sense in theory, it’s tough for investors to psychologically overcome their tendency to just leave their investments alone, said Roger Arriaga-Diaz, global head of portfolio construction at Vanguard. “We’re riding this strong performance and would like to see the balance continue to grow, but you have to keep in mind that whatever the allocation is, it’s drifting in a riskier direction,” he said. “Stocks have outperformed bonds substantially over the past year. It’s time to rebalance.”Reallocation to other parts of the market Proceeds from paring overpriced positions in stocks can be used to bolster fixed-income allocations. With interest rates rising, this step may be easier for investors to take, Arriaga-Diaz said. He added that long-term investors don’t need to take on big risks to get attractive yields in the bond market. “What you need is true diversification — Treasuries and medium- to long-term duration,” Arriaga-Diaz said. “You don’t have to push for yields.” Long-duration bonds have a higher price sensitivity to interest rate movements. Longer maturities tend to be issued. In an environment where the Federal Reserve begins to cut interest rates, prices of intermediate and long-term bonds could rise, boosting the value of your portfolio. Bond yields and prices are inversely correlated. Investors can get into that corner of the market by buying individual bonds, 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%, while the iShares Core US Aggregate Bond ETF (AGG) has a 30-day SEC yield of 4.71%. Both funds have an expense ratio of just 0.03% and duration of about six years. For stocks, it may also make sense to rebalance from growth to value and from large to small, Arriaga-Diaz adds. Small caps have lagged the broader market, with the Russell 2000 up just 1.5% in 2024. However, the category could benefit if interest rates fall, as rising interest rates make it more costly for small businesses to borrow additional money or refinance. Offerings in that space include the Dimensional US Small Cap ETF (DFAS), which has a year-to-date total return of 1% and an expense ratio of 0.26%, according to Morningstar. Also available is the Vanguard Small Cap ETF (VB), which has a 2024 return of 2.4% and an expense ratio of 0.05%. Managing the Tax Hit If you reduce a significantly appreciated position in your portfolio held in a taxable account, you may take a capital gains hit. However, there are ways to manage the impact. One possible way to mitigate your taxes is to use realized losses to offset those capital gains. Tax loss harvesting, a basic strategy in investment planning, involves reducing loss positions and using those losses to offset taxable capital gains. In a year in which losses exceed capital gains, investors can offset up to $3,000 of those losses against ordinary income and carry forward the remainder. Investors can also work with their financial advisors and accountants to reduce excess positions by donating low-basis, significantly appreciated stocks directly to charities. Typically, these holdings are the ones that would be subject to the heaviest capital gains tax if sold. Taxpayers who itemize deductions on their returns, i.e., who itemize deductions in excess of the standard deduction of $29,200 for joint filers and $14,6000 for single filers in 2024, can claim the charitable contribution tax deduction. Investors can also donate a portion of these holdings to a donor-advised fund, which allows donors to take a charitable deduction up front and then distribute the charitable grant from the account over time.
When it might make sense to sell some Nvidia for your portfolio
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