UPDATE: Investors are being urged to take immediate action as the need to rebalance portfolios for 2026 becomes increasingly critical. According to Morningstar portfolio strategist Amy Arnott, rebalancing is especially vital during periods of market volatility, which can significantly impact asset allocation.
As we approach 2026, many investors may find their portfolios skewed heavily towards US stocks, following their strong performance over the past three years. With international markets gaining momentum, this imbalance could lead to higher risks. If you haven’t reassessed your investment strategy in a couple of years, now is the time to act.
“Rebalancing isn’t equally important in every market environment,” Arnott explains. “It’s arguably more important in extremely volatile times—following a big market drop or a large runup that could quickly put your portfolio’s asset mix out of whack.” This statement underscores the urgency for investors to evaluate their current holdings.
In a rapidly changing financial landscape, especially as retirement approaches, maintaining a balanced portfolio is essential for effective risk management. Investors who are overexposed to stocks may need to consider reallocating funds into bonds or international stocks to restore harmony.
What to Watch For: Morningstar highlights that the best bond funds for rebalancing investments are in the intermediate core bond and intermediate core-plus bond categories, with several earning the prestigious Gold Medalist Rating. These funds primarily invest in high-quality US fixed-income issues, including government and corporate bonds, providing diversification while minimizing exposure to interest rate risks.
For those seeking international exposure, the foreign large-blend category is advised. Funds in this category focus on established markets in Europe and significant positions in Asia, balancing both growth and value characteristics. With a limited cap on emerging-market stocks, these funds offer a strategic approach to global investing.
Investors are encouraged to leverage existing strong positions in bonds or international stock ETFs rather than starting new investments. This strategy could help maintain a diversified portfolio without incurring unnecessary risks.
Moreover, as the market shifts, style allocations may need reviewing. The recent outperformance of US large-growth stocks over value stocks and smaller companies may create an imbalance in your asset classes. Morningstar’s portfolio tool is available for subscribers to assess if their allocations are on target.
Next Steps: Investors are recommended to consult with financial advisors and utilize available tools to make informed decisions. As we head into 2026, taking proactive steps to rebalance portfolios can significantly impact long-term financial health.
This urgent call to action comes as investors prepare for potentially challenging market conditions ahead. The time to act is now—reassess, rebalance, and secure your financial future.
