What to do after a strong 2017? Rebalance 

What to do after a strong 2017? Rebalance 

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Q: My 401(k) investments have done very well in the past several years. But I’m worried if the stock market goes down, I would stand to lose more money than before. How can I make sure I’m not taking on too much risk?

A: You’re certainly not alone with this question. As stocks have risen dramatically in the past several years, many people will find their level of stock exposure is likely greater than it used to be. Here are some thoughts on the concept of rebalancing to help keep your risk in check.

By now, you have probably received year-end statements for your investment accounts and retirement plan. If your investments include a large share of stocks or stock funds, the news was probably good. In fact, 2017 was a banner year for stocks in general. The S&P 500 increased by 19 percent for the year, the Dow Jones Industrial Average gained 25 percent, and the NASDAQ Composite increased an impressive 28 percent. Growth and value stocks both did well, while large, mid and small cap indices all saw double-digit gains.1

This strong performance adds to an already solid bull run — the second longest in history. From the start of 2009 to the end of 2017, the Dow Jones Industrial Average increased approximately 180 percent, the S&P 500 almost 196 percent, and the NASDAQ Composite an impressive 338 percent.2

Market analysts are at odds as to where the market will go from here. But they do agree on one thing: such a run-up is likely to leave many portfolios heavily weighted in stocks. For many, it could be a good time to rebalance.

Portfolio Drift 20173

A portfolio initially composed of 60-percent stocks, 30-percent bonds and 10-percent cash at the end of 2016 would have seen the stock portion grow to 64 percent by the end of 2017, due to the outperformance of stocks. Portfolio drift can be even more significant over longer time periods. A portfolio with the same allocations and initially purchased at the end of 2008 would have seen the equity portion grow to 80 percent, and the bond and cash portions shrink to 16 percent and 4 percent, respectively.3 That’s why many advisors recommend rebalancing at least once a year to help restore your original asset mix or target allocation. 

Different ways to rebalance 

There are two ways to rebalance. The first is to direct a larger percentage of your new contributions to the asset class that's lagging and therefore not in line with your long-term plan. In a workplace retirement plan, for instance, you could simply bump up your bond and cash portions until your target is restored. Another way is to sell investments in the asset class that's doing well — in this case stocks — and buy investments in the classes that did not perform as well. Keep in mind that rebalancing a portfolio may create a taxable event if done outside a tax-deferred account.

Although you may be reluctant to sell investments when their values are rising, remind yourself that you chose your asset allocation to reflect your risk tolerance, time horizon and investment objectives. If your current allocation is out of sync with these, then it may be time to rebalance. In fact, now may also be a good time to revisit your target allocation. Is it still keeping with your current circumstances? If not, realign it to fit your current objectives and rebalance accordingly. Also consider your risk exposure. A portfolio too heavily weighted in equities carries greater risk and is likely to take a bigger hit should stock prices head south.

How much longer the current bull-run will last is anyone’s guess. But you can take steps to make sure your portfolio stays aligned with your goals.

Jeremy R. Gussick is a Certified Financial Planner™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2017 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jeremy Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

1Source: DST Systems, Inc. Growth stocks represented by the S&P 500 Growth Index, Value stocks by the S&P 500 Value Index, large-cap stocks by the S&P 500 Index, midcap stocks by the S&P 400 Midcap Index, and small-cap stocks by the S&P 600 Small Cap Index. Past performance is no indication of future returns. Your results will differ.

2Source: Yahoo Finance. Price only.

3Source: DST Systems, Inc. Stocks represented by total returns of the S&P 500. Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index and Cash by Bloomberg Barclays U.S. Treasury Bill 1-3 Month Index. Past performance is no indication of future returns. Your results will differ.

This article was prepared with the assistance of DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content. 

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity

*As reported by Financial Planning magazine, June 1996-2017, based on total revenues.

**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2017 Five Star Wealth Managers.


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