Financial Advisors Prep for Annual Rebalancing Act

Bringing portfolios back into balance can take a psychological toll on clients.

With the broad market S&P 500 closing in on a 20% gain for 2023, financial advisors are rolling up their sleeves for the annual exercise of portfolio rebalancing. 

And as another reminder of how markets are made, this year’s rebalancing act illustrates a range of outlooks for what might be ahead for the markets. 

“We appear to be having a soft landing with inflation slowly coming down, interest rates have probably peaked, and GDP continue to be positive,” said Tim Smith, chief executive officer of Aurora Private Wealth. 

Smith said his economic outlook “bodes well for Treasuries and other quality debt, as well as mid-cap stocks, which have not done well of late.” 

Portfolio Rebalancing 

Sean Casterline, president and senior portfolio manager at Delta Capital Management, said his rebalancing will “capitalize on what we feel will be a good 2024 stock market.” 

He added that the technology sector that has been leading the charge in 2023, as illustrated by the strong performance of the Technology Select Sector SPDR Fund (XLK) and the Invesco QQQ Trust (QQQ), could lose some steam in the year ahead. 

“Rotations typically happen at the beginning of the year, and we are reworking the portfolios into some ETFs that we feel will do better next year,” Casterline said. “We feel that healthcare will be the sector that reemerges next year.” 

He is also staying committed to cybersecurity-related investments and sees increased risk in real estate investment trusts. 

“Real estate has always experienced a lag effect with interest rates,” Casterline said. “Historically, when rates go up, real estate prices either plateau or come down.” 

The strength of the U.S. equity market this year points toward the international markets for Robert Schultz, senior partner at NWF Advisory Group. 

“Rebalancing in order to increase international exposure is one of the main adjustments,” he said. “Also, with another negative year for the bond market, a rebalance back to the target allocation is in order for many clients.” 

Tax-loss harvesting, a crucial component of rebalancing, has been easier to manage this year, Schultz added. 

Tax Management 

Tax management is a driving force in the rebalancing process this year for Eric Amzalag, CEO of Peak Financial Planning.  

“We are trimming back positions to take profits on the tech sector and S&P 500 index funds; reducing exposure to the Magnificent Seven given how disproportionate the gains in those top 10 positions have been compared to the broader market,” he said.  

Amzalag’s rebalancing includes increasing allocations to longer-duration Treasury bonds and value stocks in the healthcare and consumer-staples sectors. 

“It is our view that [value stocks] will likely outperform in the coming 12 to 24 months given their underperformance over the past 12 months as well as the fact that they are likely going to see inflows as people flee to safety should we enter a recession,” he said. 

For Mark Matson, CEO of Matson Money, the practice of annually rebalancing client portfolios is less about making market calls than it is about keeping clients on a path toward their goals. 

“No matter what the market does in a given year, time has shown that it is always crucial to rebalance,” he said. “If you have made the commitment to hold acceptable percentages in a diversified portfolio, you need to make purchases and sales to stay on target.” 

Matson said there is a bit of psychology that comes into play when talking to clients about rebalancing, because “you have to constantly force yourself to sell a portion of the portfolio that has done well … and buy assets that haven’t done well to stay in balance.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter