by Kelly A. Henning, CFP ®, MSFS, Modera Wealth Management, LLC 

The last 17 months have been quite the run for stocks. The S&P 500 is up over 100% since the pandemic low on March 23, 2020. The MSCI ACWI, which represents large-, mid-, and small-cap stocks across a number of developed and emerging markets, is up over 97% since that same date.

The downside of such strong performance is that it can lead your allocation to become weighted too heavily toward equities versus the target asset allocation in your financial plan. It can also create some hesitancy to do anything about it since you want to let your winners run and avoid a tax hit when you sell.

Is It Time to Rebalance?

Despite the potential for capital gains, there are considerations that we review when thinking about whether to rebalance your investment portfolio:

> Asset Allocation vs. Target Plan: How do your current weightings in stocks, bonds, and cash compare with the target asset allocation in your Investment Policy Statement? If the answer is materially different from the targets, then it may be time to rebalance your investment portfolio to put you back on track. The more a portfolio “drifts” away from its intended targets, the higher the risk level.

For example, if your target portfolio is a 60% stock and 40% allocation, an increase in the value of stocks could bump you to a 65% stock and 35% bond allocation. While you have a higher potential rate of return due to the 5% increase in stocks, your risk level also increases. As a result, the value of your investment portfolio could fall more during a stock market correction. For this reason, your Modera team regularly reviews asset allocations in your portfolio for such deviations and will make rebalancing trades to bring your target allocation in line with the intended allocation.

> Tax Rates Could Change: Trying to predict future tax rates is an exercise in futility. We do know that long-term capital gains rates are low today relative to history. The current rates (federally) range from 0% to 23.8% depending on your income. The proposed American Families Plan could increase the capital gains tax to as high as 43.4% (which includes the existing 3.8% net investment income tax) for those earning $1 million or more in annual income.

Investments sold in a tax-deferred account (such as an Individual Retirement Account, or IRA) do not generate capital gains taxes (or any other current-year income taxes). Future withdrawals from the account are instead taxed at your ordinary income tax rate. Your Modera team keeps this retirement plan tax advantage in mind when considering capital gains and rebalancing your portfolio.

> You May Want the Cash: Perhaps you are thinking about buying a new car, a house, or even (finally) going on vacation. Even if you don’t have a large purchase in mind, it might be time to replenish your cash balances. Depending on your personal situation, cash holdings of between 6 months to 3 years of living expenses is a buffer to protect against a market downturn, job loss, or other change in income. For these reasons, reducing your equity exposure to raise cash accomplishes two important objectives: bringing your portfolio allocation back in line, and making sure that you still have a comfortable amount of cash.

> Retirement Plan Distributions are Back: In 2020, Required Minimum Distributions (RMDs) from retirement plans and accounts were suspended under the CARES Act due to the pandemic. In 2021, RMDs have resumed. An RMD may be a natural way for you to rebalance by selling down equity positions to make cash available for your distribution.

> Review Other Assets Outside of Modera: Keep your Modera advisor informed of other outside assets so we can help you manage your overall risk exposures and asset allocation. A potential business sale, individual stock holdings, or other highly appreciated investments should be discussed to ensure proper coordination with portfolio rebalancing and ongoing tax and investment strategies.

> Consider Gifting Appreciated Securities: Is the capital gains tax hit still too tough for you to swallow? If you do not need the cash immediately from the sale of your securities, you may also want to consider gifting your appreciated equity investments to a donor-advised fund (DAF). You can donate publicly traded stocks as well as certain private equity interests, including restricted stock or pre-IPO shares, to a DAF. By doing so, you not only avoid capital gains tax on any investments held for more than one year, but you also may receive a same-year tax deduction of up to 30% of your adjusted gross income for appreciated assets4. With charities suffering during the pandemic, this is a great way to support great causes.

Modera Wealth Management focuses on each client’s long-term financial plan and corresponding asset allocation to help them reach their goals. However, market appreciation can necessitate rebalancing trades to make sure your investment allocation is still aligned with your objectives, even if there are related tax consequences. Get in touch with your Modera team if you want to discuss. We’re always happy to help.

Kelly A. Henning, CFP ®, MSFS is a CERTIFIED FINANCIAL PLANNER® professional with Modera Wealth Management, LLC in Westwood, NJ. She may be reached at or 201-768-4600.

Modera Wealth Management., LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.

Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.

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