Outsmart Volatility: Why it's Important to Rebalance Your Investments Now

February 10, 2025

While the Chiefs and Eagles were dueling it out in the Super Bowl Sunday evening, I was entrenched in a battle of my own with my two year-old daughter for control of the TV remote. Would we watch the once-a-year primetime event on the big screen or Disney’s Frozen for the third time in as many days? I’m sure you can guess how that went. I quickly realized that the risk of a tantrum was mounting and decided to “Let it Go”. Just as parents take measures to prevent volatility in our kid’s behavior, investment managers have the responsibility of managing risk in client portfolios.

As Tom mentioned last week, there has been no shortage of headlines in 2025 that have introduced volatility (a measure of risk) into markets. He noted that one way we can combat this is by maintaining a well-diversified portfolio. The chart below from JP Morgan shows asset class returns across the past 15 years. Each column ranks returns from best to worst in the respective calendar year. While U.S. Large Cap stocks (light green) have done particularly well over this time period, it is nearly impossible to predict what the top performing asset will be from year to year. However, a balanced mix of these assets such as a 60% stock and 40% bond portfolio (represented in white) can help deliver favorable returns while limiting risk.

Data as of February 7, 2025. Source: JP Morgan Guide to the Markets

Another way we manage risk is through the process of portfolio rebalancing, or adjusting investments to align with an objective. As we saw in the chart above, U.S. Large Cap stocks greatly outperformed traditional Fixed Income (dark blue) in 2023 and 2024. As a result, large U.S. stocks became overweight and fixed income investments underweight to the allocation and risk profile originally desired. An example of this drift can be seen in the chart below. Without rebalancing, a diversified 60% stock/40% bond portfolio in 2019 would currently be invested with an allocation of roughly 75% stock/25% bonds in the early part of 2025.

Data as of February 7, 2025. Source: JP Morgan Guide to the Markets

Throughout the first quarter, we will be rebalancing client portfolios to bring allocations back in line with investment objectives. Additionally, we will be implementing minor changes based on some prevailing themes discussed in previous commentaries: a healthy US economy; slower growth abroad; a declining interest rate environment; and a broadening of equity performance outside of large technology companies. We may be starting to see the latter, with Information Technology the only S&P 500 sector as a whole to be down in January. To further discuss risk management and the investment landscape for 2025, please reach out to an Advisor. Your financial security matters to us.