In 2024, the financial markets experienced a significant climb. As a result, investors might need to reevaluate and readjust their portfolios to ensure their investment allocations are still on track with their financial goals.

The S&P 500, an index of the largest publicly traded U.S. companies based on market capitalisation, saw a growth of 23% in 2024. The total S&P 500 returns over the previous two years were 53%, the highest observed since the years 1997 and 1998.

Typically, long-term investors aim to keep a balanced portfolio of stocks and bonds, often split 60/40 respectively. However, the impressive returns from stocks compared to the more subdued gains for bonds, may have disrupted this balance. It’s possible this has left portfolio holdings more risk-prone than desired.

Given these circumstances, financial professionals have advised that it may be an appropriate time for investors to reassess and rebalance their portfolios.

Rebalancing is a process that aligns a portfolio with the investor’s long-term financial objectives. This ensures that no specific asset class is carrying too much or too little of the investment weight. Ted Jenkin, a certified financial planner and member of CNBC’s Financial Advisor Council, likens the process to giving your car an alignment check at the start of the year.

So, how does one go about rebalancing their portfolio? Lori Schock from the Securities and Exchange Commission Office of Investor Education and Advocacy provides an example. If your initial portfolio was divided into 80% stocks and 20% bonds, and after a year of market changes it’s become 85% stocks and 15% bonds, you might consider selling 5% of your stocks and buying more bonds to return to the original 80/20 allocation.

Rebalancing isn’t just about stocks and bonds. Investors often hold other financial assets such as cash, and diversify their portfolios by including various categories within asset classes.

However, it’s crucial for investors to evaluate whether their targeted weights to certain categories have been disrupted. The tech sector, for instance, significantly outperformed most other sectors in 2024. The “Magnificent 7” tech stocks – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla – accounted for more than half of the S&P 500’s total gain in 2024.

While rebalancing, investors should also consider the tax implications. Selling securities to rebalance might trigger short- or long-term capital gains taxes, especially for those with taxable accounts. However, investors with 401(k) plans and individual retirement accounts generally don’t need to worry about such tax consequences.

In conclusion, the year 2024 was a standout year for stocks, especially within the tech sector. However, it’s crucial for investors to reassess and rebalance their portfolios to ensure they are still aligned with their long-term financial goals.