Have You Rebalanced Lately? Doubt It. Here’s Why You Should Be Thinking About It

Most of America’s money is on autopilot — parked in 401(k)s and IRAs, and managed by robo-advisors or financial planners. But every once in a while, it pays to intervene.

In recent years, the bull market has centered on a handful of megacap tech stocks, lifted by AI optimism. But with rising concerns around valuations, the durability of data center spending, and dollar headwinds, it might be time to check in on your portfolio.

When passive is too much: Never in history have so few firms represented such a large share of the most-tracked indexes — the top 10 stocks now account for 38.7% of the S&P 500 and 70% of the Nasdaq 100. And globally, never have US equities represented a greater share of the financial pie, almost $68T in total market cap. This, of course, has been very lucrative for passive investors without help, but ‘portfolio drift’ could become a risk — especially as an already-concentrated market becomes even more concentrated. There are ways to break up that risk without abandoning low-cost, passive strategies:

• Rebalancing offers a way to sell outperforming stakes high, take profits, and buy other assets with more favorable valuations or possible upside.
• Breaking up your portfolio occasionally and rebalancing it helps you stay on track with your goals — not letting one component of your portfolio carry too much.

Breaking It Down

The biggest challenge with rebalancing is setting a target. High-level, Vanguard offers model portfolios — for 100% stock portfolios, it suggests holding 53-62% in US stocks, with the rest in international markets. But there are other approaches:

• If you rely on a financial advisor or robo-advisor to manage your money, you may already have target allocations and automatic rebalancing — but it’s worth checking.
• If you manage your own portfolio, consider borrowing allocation ideas from Wealthfront or Betterment, depending on how specific you want to get.
• For the really adventurous, the rebound of direct indexing might also appeal —eliminating a lot of the need for onerous ETF-specific optimization.

But a friendly reminder: Breaking up your portfolio into constituent parts and rebalancing them based on pre-set allocations is not to be confused with tactical trading, which involves trying to time the market. This has been found to be counterproductive in research from firms like Vanguard, with Americans buying single-stock funds often ending up better. Still, there are benefits to rebalancing and achieving greater optionality in your portfolio, which should not be discounted — just don’t drive yourself crazy.