Bond decline and stock boom: Why rebalancing is a good strategy now

With a global bond sell-off, stock prices near record highs and investors grappling with geopolitical uncertainty, now may be an especially good time for investors to consider rebalancing their portfolios, financial advisers say.

“I think this is one of the least sexy investment ideas out there, but probably one of the most profitable,” said Jude Boudreau, a New Orleans-based certified financial planner and member of CNBC’s Financial Advisor Council.

When an investor rebalances, their asset allocation returns to the target level.

For example, an investor may decide that a combination of 60% stocks and 40% bonds (a classic 60/40 portfolio) is appropriate given their tolerance for market risk and the number of years until retirement.

However, over time, the market naturally distorts these allocations.

Stocks, the traditional growth engine for portfolios, have boomed in recent years.

of S&P500 Factors such as excitement about technology companies and artificial intelligence led the stock index to return 24% in 2023, 23% in 2024, and 16% in 2025, well above its long-term average of about 10%.

Although the S&P 500 index has fallen slightly from its all-time high in August, stocks are up more than 11% so far in 2026.

Meanwhile, bonds have fallen sharply amid widespread selling since the start of the Iran war in late February.

Bond prices generally move inversely to yields, and bond yields around the world have risen to multi-year highs. Investor concerns about inflation and debt are weighing on borrowing costs for governments around the world.

The yield on the 10-year U.S. Treasury bond on Wednesday hit its highest level since 2023.

As a result, the value of investment funds linked to long-term bond prices fell. For example, as of Wednesday afternoon, the iShares 7-10 Year Treasury ETF (IEF) is down more than 4% so far this year, excluding dividends. Fidelity Long Term Government Bond Index Fund (FNBBGX) fell more than 5%.

Taken together, it is highly likely that investors’ asset allocations have become overweight in stocks, making their portfolios riskier than intended.

“Equities are definitely a big part of most portfolios, not just technology-heavy portfolios,” said Kathy Curtis, a certified financial planner based in Oakland, Calif., and a member of CNBC’s Council of Financial Advisors. “We had pretty broad gains across the market.”

Advisers say there’s more to rebalancing than just returning to a targeted portfolio risk.

For example, it helps investors lock in profits from successful investments by transferring the profits to another part of their portfolio.

“It’s a disciplined way of buying low and selling high, which is historically the basic idea of ​​what you should do in the (financial) markets,” Boudreau said.

In today’s market, investors are likely to shift gains from stocks to the fixed income side of their portfolios, simultaneously reducing their stock allocation and increasing their fixed income allocation.

Advisers say investors may be wary of buying bond funds now that prices are low, but this is an opportunity to buy them at a slight discount. This is also known as “buying on the edge”, which is often recommended when stock prices are falling.

By providing a framework for trading, rebalancing also helps take the emotion out of investing and eliminates the temptation to time the market, an action that often results in poor results.

This is important in today’s environment for investors who may be tempted to exit stocks amid uncertainty such as the Iran war. Stocks fell on Wednesday as oil prices topped $100 a barrel, raising concerns about inflation.

“Investors have a lot to worry about right now, including multiple geopolitical conflicts, a new (Federal Reserve) chair, an election cycle, rising budget deficits, and AI disruption,” Curtis said. “Rather than trying to figure out which of these issues will ultimately matter to the market, investors can use rebalancing to reduce risk to a more reasonable level.”

Advisers say the same is true for people who are lured into stock-heavy portfolios, lured into a false sense of security after years of rapid growth.

“When the market is going up, people forget that the market can go down,” said CFP Camilla Elliott, co-founder of Atlanta-based Collective Wealth Partners and a member of CNBC’s Financial Advisor Council.

Investors shouldn’t confuse this rebalancing with selling all their holdings and going completely into cash, he said.

“We’re not telling people to sell all their stocks. This is not a fire sale,” Elliott said.

Rather, he said, it’s time for investors to readjust their risk tolerance, a measure of how comfortable they are with potential losses in their investment portfolios.

Elliott said investors nearing retirement may use the current environment as an opportunity to rebalance gains from their stock portfolios and add them to cash accounts, which could be used as an early source of income in retirement if their holdings decline in value.

Investors can determine their tolerance for and ability to handle losses by completing a risk tolerance questionnaire. This survey is available on the websites of most major asset management companies, including Vanguard Group. Fidelity Investments and T. Rowe Pricesaid Elliott.

People enrolled in 401(k) plans will also likely be able to log into their accounts and complete the survey on the administrator’s website, she said.

Of course, it’s important to remember that rebalancing can have tax implications for certain investors, especially those with taxable brokerage accounts, the advisers said.

Unlike tax-advantaged retirement accounts such as 401(k)s and IRAs, buying and selling within a taxable account can result in taxes.

Investors may be able to gradually change their allocation over time or strengthen the allocation of one side of their portfolio without selling other parts.

“Rebalancing doesn’t necessarily mean reaching the target allocation all at once,” Curtis said. “You can also use new cash flows, withdrawals, and tax-aware trading to return your portfolio to your desired allocation.”