It's time to adjust your investments after a successful 2024 stock market.

• In 2024, the Nasdaq, which is tech-heavy, experienced a growth of approximately 29%, while the S&P 500 stock index saw a gain of 23%.
• To achieve their investment targets, investors may need to adjust their portfolios by reallocating funds from lofty stock returns to muted bond growth.
• Otherwise, a portfolio may be riskier than intended.

Stocks soared in 2024.

After celebrating your portfolio's success, it may be necessary to reevaluate your investment allocations due to the potential disruption caused by the heady returns.

In 2024, the S&P 500, a stock index of the largest public U.S. companies by market capitalization, experienced a 23% increase. Over the past two years, the cumulative S&P 500 returns were the best since 1997 and 1998, with a total return of 53%.

Investors typically aim for a long-term allocation of 60% stocks and 40% bonds. However, if stock returns exceed bond returns, the portfolio may be misaligned and riskier than desired. According to the Bloomberg U.S. Aggregate Bond Index, U.S. bonds returned 1% in the recent period.

Financial advisors advised that now is a suitable time for investors to adjust their investment portfolios.

Ted Jenkin, a certified financial planner in Atlanta and a member of CNBC's Financial Advisor Council, stated that rebalancing a portfolio helps align it with investors' long-term goals by preventing over or underweighting in a specific asset class.

Jenkin, co-founder of oXYGen Financial, stated that just as every car should undergo an alignment check at the start of the year, the same applies to investment portfolios.

How to rebalance your portfolio

According to Lori Schock, director of the Securities and Exchange Commission Office of Investor Education and Advocacy, here's a simple example of how portfolio rebalancing works.

To restore the 80/20 mix of stocks to bonds in your portfolio, you can sell 5% of your stocks and use the proceeds to purchase more bonds, advised Schock.

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Determine the growth targets and relative weight of each investment in your portfolio, advised Callie Cox, chief market strategist at Ritholtz Wealth Management.

""Regularly, portfolio managers on Wall Street adjust their allocations to maintain a balanced return on investment," she advised."

A 'huge gap in market fortunes' in 2024

Rebalancing isn't limited to stocks and bonds; investors may also have other financial assets like cash to consider.

A diversified portfolio also generally includes various categories within asset classes.

An investor's stock portfolio may consist of various types of stocks, including large-cap, mid-cap, and small-cap stocks; value and growth stocks; U.S. and international stocks; and stocks from different sectors such as technology, retail, and construction.

Advisors advised investors to assess if their target weights to specific categories have become misaligned.

"Last year, the tech industry outperformed other sectors, causing a significant difference in market performance, according to Cox."

In 2024, the "Magnificent 7" tech stocks, including Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla, contributed more than half of the S&P 500's total growth. Additionally, the Nasdaq, a tech-focused stock index, experienced an almost 29% increase.

According to experts at Vanguard's Investment Advisory Research Center, non-U.S. stocks underperformed last year, with a return of approximately 5%.

"Cox advised reviewing tech investments and considering taking profits, stating, "While tech dominates our daily lives, it doesn't always dictate our investment portfolios.""

Don't forget about taxes

Jenkin stated that investors in 401(k) plans can benefit from automatic rebalancing tools, simplifying the process if they understand their risk tolerance and investment time frames.

Investors can opt for mutual funds or exchange-traded funds that offer professional money managers to handle regular rebalancing, such as within target-date funds.

Tax implications should also be taken into account when rebalancing.

If investors with taxable accounts sell securities to rebalance, they may incur "unnecessary" short- or long-term capital gains taxes, according to Jenkin. On the other hand, retirement investors with 401(k) plans and individual retirement accounts are not typically affected by such tax implications.