There was a seismic shift in the market last week after the Federal Reserve signaled that interest rate cuts are coming in 2024. Following that announcement on Wednesday, the Dow Jones Industrial Average closed at a new record high.

Income stocks have been battered this year, but the shift in the Fed’s stance probably marks a significant shift in the fortunes of beleaguered income stocks. In fact, there were numerous double-digit gainers in portfolios I manage in the immediate aftermath of the announcement. These portfolios are income-heavy, and the portfolio gains have been double or more those of the S&P 500.

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When a historic shift like this happens, there is a lot of money to be made. This is especially true for those who sell covered calls or cash-covered puts. When the market pivots, option premiums can skyrocket. So, one thing investors should do in the wake of the Fed’s pivot is review their portfolio holdings and see if any new trading opportunities arose. Speaking from experience, that was certainly the case in my own portfolio.

Rebalancing Portfolios

Coincidentally, since it’s near the end of the year, it also serves as a reminder to rebalance your portfolio. Many investors rebalance their portfolios to maintain their desired asset allocation. If certain sectors have performed exceptionally well or poorly during the year, the investor may adjust their holdings to restore the intended balance of assets.

Think of this as a risk management tool. As the economy progresses through cycles, portfolio rebalancing forces investors to take profits and invest in sectors that have underperformed.

An Example

Let’s consider a simple example to illustrate.

Assume at the beginning of 2023 you had a portfolio that was 50% technology holdings and 50% energy holdings. So far this year, the technology sector has returned 54%, while the energy sector is down 4%. That means that your portfolio would now be 38% energy holdings and 62% technology. You will have become overweight technology, and if you are intent on maintaining balance, you should reallocate.

Bear in mind that this is just the opposite of what you would have done a year ago. The energy sector returned 64% in 2022, while the technology sector lost 28%. Last year’s reallocation would have had you selling some of your energy profits and shifting them into technology.

Now consider the two year returns with and without rebalancing. If you had $1,000 in each sector at the beginning of 2022, at year end you would have had $1,640 in the energy sector and $720 in technology for a total of $2,360. If we do not reallocate, then at this point in 2023 we would have had $1,574 in the energy sector and $1109 in the technology sector for a total of $2,683.

That’s not a bad two-year return, but it would have been better if we had rebalanced. If we had taken the total at the end of 2022 and reallocated it back to the 50-50 balance, at this point in 2023 we would have had $2,950. That’s 10% more from rebalancing.

Thus, my advice in the wake of this market shift is to review your portfolio holdings. Look at holdings in which prospects may have changed for better or worse and consider whether you need to rebalance your portfolio as the year comes to a close.

Editor’s Note: Robert Rapier just provided you with invaluable investment advice. But we’ve only scratched the surface of our team’s expertise.

For market-thumping gains with mitigated risk, I suggest you also consider the advice of our colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron, and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

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