Bond sell-off, stock boom: Why rebalancing is a good strategy right now

As global bonds sell off, stocks hover near all-time highs and investors grapple with geopolitical uncertainty, it may be a particularly good time for investors to consider rebalancing their portfolios, according to financial advisors.

"I feel like it's one of the least sexy — but probably most useful — investment ideas around," said Jude Boudreaux, a certified financial planner based in New Orleans and member of CNBC's Financial Advisor Council.

When investors rebalance, they bring their asset allocation back to a target level.

For example, investors may have determined that a mix of 60% stocks and 40% bonds — the classic 60/40 portfolio — is appropriate given their tolerance for market risk and the number of years until they retire.

But the market naturally throws those allocations out of whack over time.

Stocks, which are the traditional growth engine of a portfolio, have boomed in recent years.

The S&P 500 stock index saw returns of 24% in 2023, 23% in 2024 and 16% in 2025 — well above the long-term average of around 10% — due to factors like euphoria over technology companies and artificial intelligence.

Though the S&P 500 has dipped slightly from an all-time high in August, stocks are still up more than 11% so far in 2026.

Meanwhile, bonds have swooned since the start of the Iran war at the end of February, amid a broad sell-off.

As a rule, bond prices move opposite to their yield — and yields on government bonds around the world have climbed to multiyear highs. Investor concerns about inflation and debt have pressured global government borrowing costs.

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

As a result, investment funds that track the prices of long-term bonds have fallen in value. For example, as of Wednesday afternoon, the iShares 7-10 Year Treasury Bond ETF (IEF) is down more than 4% so far this year, excluding dividends. The Fidelity Long-Term Treasury Bond Index Fund (FNBGX) has fallen more than 5%.

Take this all together, and it's likely investors' asset allocations have gotten stock-heavy — and their portfolios perhaps riskier than intended.

"No doubt, equities have become a larger part of most portfolios and not just those that are technology-heavy," said Cathy Curtis, a certified financial planner based in Oakland, California, and a member of CNBC's Financial Advisor Council. "Gains have been fairly broad across the market."

Aside from toggling back to a targeted portfolio risk, rebalancing carries many additional benefits, advisors said.

For example, it helps investors lock in profits from their winning investments by shifting gains to another part of their portfolio.

"It's a disciplined way to buy low and sell high, which historically is the fundamental idea of what to do in [financial] markets," Boudreaux said.

In today's market, investors would most likely be shifting profits from stocks to the bond side of their portfolio — simultaneously reducing their stock allocation and raising their bond allocation.

While investors may be wary of buying bond funds right now given their depressed value, it's an opportunity to buy them at a slight discount, advisors said. It's a common recommendation when stocks fall, too, known as "buying the dip."

Rebalancing also helps take emotion out of investing and the temptation to time the market — a behavior that often carries bad outcomes — by providing a framework for trading.

This is important in today's environment for investors who may be tempted to ditch stocks amid uncertainties like the Iran war. Stocks slid Wednesday as oil prices topped $100 a barrel, fueling inflation concerns.

"Right now, investors have plenty to worry about: multiple geopolitical conflicts, a new [Federal Reserve] chair, the election cycle, rising deficits, and AI disruption," Curtis said. "Rather than trying to figure out which of those issues will ultimately matter to the markets, investors can use rebalancing to reduce risk to a more reasonable level."

The same is true for those who are tempted to ride a stock-heavy portfolio, lured by a false sense of security after years of booming returns, advisors said.

"When the market is up, people forget it can go down," said CFP Kamila Elliott, co-founder of Collective Wealth Partners based in Atlanta and a member of CNBC's Financial Advisor Council.

Investors shouldn't confuse this rebalancing for selling all their stocks and moving entirely to cash, she said.

"We're not telling people to sell out of all your equity — this isn't a fire sale," Elliott said.

Instead, it's time to make sure investors are realigned to their risk tolerance, a measure of how much comfort they have with potential loss in their investment portfolio, she said.

Investors approaching retirement may use the current environment as an opportunity to rebalance profits from their stock portfolio and add to a cash account, which they can use in the early years of retirement for income if their stock holdings have fallen in value, Elliott said.

Investors can determine their stomach for and ability to handle losses by filling out a risk tolerance questionnaire, which is available on the websites of most major asset managers like Vanguard Group, Fidelity Investments and T. Rowe Price, Elliott said.

Those enrolled in a 401(k) plan can also likely log into their account and fill out a questionnaire on their administrator's website, she said.

Of course, it's important to remember that rebalancing can have tax implications for certain investors, particularly those with taxable brokerage accounts, advisors said.

Unlike with tax-advantaged retirement accounts like 401(k)s and IRAs, buying and selling within taxable accounts can generate a tax bill.

Investors may be able to shift allocations gradually over time, or beef up an allocation on one side of their portfolio without selling elsewhere.

"Rebalancing doesn't necessarily mean getting to a target allocation all at once," Curtis said. "New cash flows, withdrawals and tax-aware trades can also be used to move a portfolio back towards a desired allocation."