If you’ve been investing for any length of time, you know that markets don’t stand still – so neither should your portfolio. We’re a few months into 2025 now, and economic conditions, interest rates, and global trends continue to shift, meaning your once-perfect asset allocation may no longer align with your financial goals. That’s why rebalancing your portfolio in 2025 is worth considering. But how do you do it effectively without disrupting your long-term strategy? Let’s dive into the key considerations to keep your investments aligned with your objectives.
Why Rebalancing Your Portfolio in 2025 Matters
Rebalancing isn’t just about tweaking numbers on a spreadsheet—it’s about maintaining a structured approach to investing. Over time, some asset classes will outperform others, causing your portfolio to drift from its original asset allocation. Without rebalancing, you may be exposed to more risk than intended or miss opportunities for growth.
In 2025, factors like inflation concerns, potential interest rate changes, and evolving market trends make regular rebalancing something to strongly consider. Any adjustments you make may help align your portfolio with your risk tolerance, risk capacity, and financial goals.
SEE ALSO: Risk Tolerance Decoded: Why It’s a Pivotal Factor in Your Investment Journey
Key Considerations for Rebalancing
1. Assess Your Current Allocation
Before making any changes, start by reviewing your portfolio’s current asset allocation. Compare it to your target allocation and determine where imbalances have developed. For instance, if your equities have surged in value while your bond holdings have remained stagnant, rebalancing may be necessary to maintain your intended level of risk.
2. Factor in Market Trends and Economic Conditions
2025 brings new market dynamics that could impact rebalancing decisions. Consider factors like:
- Interest rate policies and their effect on bonds and stocks
- Sector performance and emerging investment opportunities
- Inflation trends and how they impact different asset classes
By staying informed, you can make decisions that align your risk tolerance and risk capacity with market realities.
3. Set Rebalancing Triggers
Rather than trying to time the market, consider setting triggers for rebalancing. These could be based on:
- Time-based triggers (e.g., quarterly or annual rebalancing)
- Threshold-based triggers (e.g., if an asset class shifts more than 5% from its target allocation this also includes capital appreciation or depreciation in a specific investment)
Having a structured approach removes emotional decision-making and helps you keep your portfolio aligned with your targets.
SEE ALSO: Mastering the Long Game: Why You Should Stay in the Market Even When It’s Volatile
4. Consider Tax Implications
Rebalancing often involves buying and selling assets, which could trigger realized capital gains taxes. To manage tax consequences if your portfolio is invested in a taxable account:
- Prioritize rebalancing within tax-advantaged accounts (IRAs, 401(k)s, etc.)
- Use tax-loss harvesting to offset gains
- Consider more tax-efficient investment vehicles, such as ETFs as opposed to mutual funds
Working with a Registered Investment Advisor can help with tax-efficient rebalancing.
5. Evaluate Your Risk Tolerance, Risk Capacity, and Time Horizon
As you rebalance, reassess your risk tolerance, risk capacity, and investment goals. If your time horizon has changed—for example, if you’re nearing retirement (lower risk capacity) —you may need to shift your asset allocation towards more conservative investments. Conversely, if you have a long runway (higher risk capacity), you may decide to take on more growth-oriented investments.
Stay Proactive, Stay Balanced
Rebalancing your portfolio in 2025 is not a one-time task but an ongoing strategy to keep your investments aligned with your goals. By regularly reviewing your portfolio, considering market conditions, and making tax-conscious adjustments, you can adapt to the evolving financial landscape.
If you want an actively managed approach to rebalancing, Davidson Capital Management is here to help. Our team can provide in-house, discretionary asset management based on your unique financial situation and long-term objectives. Contact us today to schedule a portfolio review and analysis.
