Investment Strategy2025-11-13
Year-End Asset Allocation Review: Rebalancing for 2026
U.S. equities surged roughly 23% in 2025, causing many portfolios to drift significantly from their target asset allocations. A year-end rebalancing is essential to realign equity weightings and design an optimal allocation that can weather 2026 market volatility.
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With the S&P 500 up 23.5% and the Nasdaq surging 27.2% in 2025, a portfolio set at 60% stocks / 40% bonds at the start of the year now looks more like 68% stocks / 32% bonds. A deviation of +8 percentage points from target can lead to larger-than-expected losses in a 2026 correction, making year-end rebalancing essential. Use the rebalancing calculator to measure the gap between current and target weightings, then sell roughly 8% of equities and buy bonds to close the gap. Feed your age, risk tolerance, and investment horizon into the asset allocation calculator to redesign the optimal 2026 mix. Leverage tax-loss harvesting and ISA accounts to minimize rebalancing costs, and consider directing new cash inflows toward underweight assets so you can rebalance without any forced selling.
2025 Asset Class Performance and Allocation Drift Analysis
The divergence in 2025 asset class returns was stark. On the equity side, the Nasdaq 100 (QQQ) gained +27.2%, driven by AI and mega-cap tech, while the S&P 500 (SPY / VOO) rose +23.5%, reflecting the broad market advance; dividend stocks (SCHD) gained a more modest +14.2% due to their defensive character, and small-caps (IWM) rebounded +18.5% in the second half on rate-cut expectations. On the fixed income side, long-term Treasuries (TLT) rose +7.1% as yields fell, while intermediate Treasuries (IEF) gained +3.5% with their lower duration limiting upside; the broad bond aggregate (AGG) returned +2.8%, stable but well behind equities. Among alternative assets, REITs (VNQ) gained +12.3% as falling rates improved real estate valuations, gold (GLD) gained +8.5% on safe-haven demand from geopolitical risks, and commodities (DBC) fell -2.1% on lower oil prices.
To illustrate portfolio drift: consider a target allocation of 60% stocks (SPY 40%, QQQ 20%) + 40% bonds (AGG 30%, TLT 10%), with an initial investment of ₩100 million. The year-end values would be SPY ₩49.4M (+23.5%), QQQ ₩25.44M (+27.2%), AGG ₩30.84M (+2.8%), and TLT ₩10.71M (+7.1%), for a total of ₩116.39M. The resulting weightings—SPY 42.5%, QQQ 21.9%, AGG 26.5%, TLT 9.2%—place equities at 64.4% (target: 60%) and bonds at 35.7% (target: 40%), a drift of +4.4 pp for stocks and -4.3 pp for bonds. The cost of ignoring this drift: if equities fall 10% in 2026, a 64.4% equity weighting produces a -6.4% portfolio loss, versus -6.0% at the 60% target—an extra -0.4 pp, or roughly ₩400,000 in additional losses on a ₩100M portfolio. The case for rebalancing is clear.
Adjustment Strategy Using the Rebalancing Calculator
Use the rebalancing calculator to determine exact buy and sell amounts.
**Resetting target weightings:** The current snapshot is total assets ₩116.39M, equities 64.4%, bonds 35.7%. Confirm your target—60% stocks / 40% bonds maintained, or adjusted for age and risk; investors in their 50s or older should consider shifting to a more conservative 50% stocks / 50% bonds.
**Calculator inputs:** Total assets ₩116.39M; target equity 60% (₩69.83M) vs. current 64.4% (₩74.95M); target bonds 40% (₩46.56M) vs. current 35.7% (₩41.55M). Output: sell ₩5.12M of equities (₩74.95M − ₩69.83M), buy ₩5.01M of bonds (₩46.56M − ₩41.55M). The ₩110,000 gap covers transaction fees and FX conversion costs; amounts this small may reasonably be left in cash or skipped.
**Intra-asset rebalancing:** Within equities, sell ₩3.00M of SPY and ₩2.12M of QQQ, realizing gains first from the highest-returning positions. Within bonds, buy ₩4.00M of AGG and ₩1.01M of TLT, prioritizing stability by increasing AGG exposure.
**Execution sequence:** Step 1—sell equities (SPY ₩3.00M + QQQ ₩2.12M = ₩5.12M); Step 2—convert to KRW and buy bonds (AGG ₩4.00M + TLT ₩1.01M); Step 3—verify final weightings (equities 60.0%, bonds 40.0%).
**Transaction costs:** Overseas equity commission 0.25% × 2 (sell + buy) = 0.5%, so roughly ₩26,000 on ₩5.12M; FX spread at a preferential rate of 0.3% adds about ₩15,000, for a total cost of roughly ₩40,000—modest relative to the rebalancing benefit.
**Tax optimization:** Capital gains on overseas equities are taxed at 22% above a ₩2.5M annual exemption. SPY gains of ₩940,000 + QQQ gains of ₩900,000 = ₩1.84M, which falls under the ₩2.5M threshold and is therefore tax-free. If no further sales are made before year-end, you can still realize up to ₩660,000 more in gains tax-free. Using an ISA account allows up to ₩2M in gains to be sheltered, bringing the rebalancing tax cost to zero.
Designing the Optimal 2026 Allocation with the Asset Allocation Calculator
Design an optimal asset allocation for 2026 taking market outlook into account.
**Key macro variables:** The Fed is expected to cut rates by a further 75 bp through mid-2026, creating a bond-friendly environment. A soft landing is the base case, but slowing growth argues for defensive assets. The S&P 500 forward P/E of 21× is elevated, raising correction risk. U.S.–China trade tensions and Middle East conflict warrant some safe-haven exposure.
**Age-based allocations:**
- *30s (aggressive):* 70% stocks (SPY 35%, QQQ 25%, SCHD 10%) + 20% bonds (AGG 15%, TLT 5%) + 10% alternatives (VNQ 5%, GLD 5%)—growth-oriented with volatility mitigation.
- *40s (balanced):* 60% stocks (SPY 30%, QQQ 15%, SCHD 10%, IWM 5%) + 30% bonds (AGG 20%, TLT 10%) + 10% alternatives (VNQ 5%, GLD 5%)—balanced growth and stability.
- *50s (conservative):* 50% stocks (SPY 25%, SCHD 15%, QQQ 10%) + 40% bonds (AGG 30%, TLT 10%) + 10% cash—reduced volatility with an eye toward retirement.
- *60+ (income-focused):* 30% stocks (SCHD 15%, SPY 15%) + 60% bonds (AGG 45%, TLT 15%) + 10% cash—income and capital preservation first.
**Risk-tolerance-based allocations:**
- High risk tolerance (accepting ~20% annual volatility): 80% stocks + 15% bonds + 5% alternatives.
- Moderate risk tolerance (~15% volatility): 60% stocks + 30% bonds + 10% alternatives.
- Low risk tolerance (~10% volatility): 40% stocks + 50% bonds + 10% cash.
**Calculator example:** Inputs—age 45, moderate risk tolerance, 20-year horizon, 8% target return. Output—recommended allocation: 60% stocks, 30% bonds, 10% alternatives; projected return 8.2% p.a., projected volatility 14.5% p.a., maximum drawdown at 95% confidence -18.8%. Detailed allocation: SPY 30%, QQQ 15%, SCHD 10%, IWM 5%, AGG 20%, TLT 10%, VNQ 5%, GLD 5%. Use this as the target for rebalancing the current portfolio.
Cost-Minimizing Rebalancing Techniques
Practical techniques to minimize rebalancing costs.
**New-cash rebalancing:** Direct new inflows—salary, bonus, etc.—entirely into underweight assets to correct drift without any selling. For example, if equities are at 64% against a 60% target, deploying ₩5M of new cash entirely into bonds naturally reduces the equity weight. Transaction fees and taxes are zero.
**Dividend reinvestment rebalancing:** Use quarterly dividends from high-yield ETFs such as SCHD and VYM to buy underweight assets. With ₩3M in annual dividends, reinvesting them into bonds or gold provides automatic rebalancing with minimal manual effort.
**Band rebalancing:** Only rebalance when a position drifts more than ±5 pp from target, avoiding excessive trading. With a 60% equity target, maintain the portfolio anywhere in the 55–65% range, and only trade when outside that band. Minor drifts of ±2 pp or less can wait until the next quarterly review.
**Pairing tax-loss harvesting:** Sell loss positions to realize a tax deduction, then immediately repurchase a similar ETF to maintain exposure. For example, if TLT is down 5%, sell it and buy IEF to keep bond exposure while locking in the loss. Realized losses offset gains from other positions, reducing capital gains tax, and unused losses can be carried forward for up to three years.
**Prioritizing tax-advantaged accounts:** In an ISA, gains up to ₩2M (₩4M for lower-income accounts) after three years are tax-free, so rebalancing trades produce no taxable event. In pension savings accounts, gains are tax-deferred, maximizing the long-term compounding effect. In taxable brokerage accounts, gains above ₩2.5M are taxed at 22%, so exhaust tax-advantaged capacity first.
**Rebalancing frequency:** Quarterly rebalancing suits high-volatility environments; annual or semi-annual rebalancing reduces costs in calmer markets; event-driven rebalancing (triggering on a -10% or greater drawdown or a +15% or greater surge) captures opportunities as they arise. A year like 2025—with equities up 23%—calls for mandatory year-end rebalancing.
Year-End Portfolio Review Checklist for 2026
A comprehensive year-end portfolio review should cover the following.
**Asset allocation review:** Calculate current weightings across stocks, bonds, alternatives, and cash. Identify any position with drift greater than ±5 pp from target. Reassess whether target allocations still fit your age and risk profile. Incorporate 2026 macro views—rates, economic trajectory, and valuations.
**Individual asset review:**
- *Equity ETFs:* Is QQQ weight too concentrated (keep below 20%)? Have you secured dividend income with SCHD? Have you diversified into small-caps (IWM)?
- *Bond ETFs:* Is AGG covering your core bond exposure (at least 50% of bond allocation)? Is TLT weight manageable given interest-rate sensitivity (keep below 25% of bond allocation)? Does the duration mix match your investment horizon?
- *Alternatives:* Does VNQ (5–10%) provide inflation hedging? Does GLD (5%) protect against tail risk? Consider trimming DBC if it is showing losses.
**Performance analysis:** Check whether total 2025 returns met your goal. Compare against the S&P 500 benchmark for over- or underperformance. Evaluate risk-adjusted returns via the Sharpe ratio. Confirm that maximum drawdown during the year stayed within your tolerance.
**Risk management review:** A single ETF above 30% of the portfolio indicates inadequate diversification. Technology-sector exposure above 40% of the total portfolio is a warning sign. U.S. assets above 80% of the portfolio warrants consideration of global diversification (VXUS). ETFs with average daily volume below 1 million shares should be evaluated for liquidation.
**Tax and cost review:** Verify that you have used the ₩2.5M annual capital-gains exemption; if not, realize additional gains before year-end to use up the allowance. Confirm the 15.4% withholding on overseas dividends and check ISA tax-free limits. Review whether any high-cost ETFs (0.5%+ expense ratio) can be swapped for lower-cost alternatives. Confirm that a preferential FX rate is being applied; if not, consider switching brokers.
**2026 planning:** Set a realistic annual return target (8–12%). Confirm a fixed rebalancing schedule (quarterly or semi-annually). Decide on a monthly contribution amount and allocation direction. Prepare a response plan for a -20% market drawdown (raising cash, adding to positions, etc.).
Conclusion
The strong 2025 equity rally has pushed many portfolios well off their target allocations. Use the rebalancing calculator to determine precise adjustment amounts, then use the asset allocation calculator to design an optimal weighting for 2026 that can withstand volatility. Minimize costs through new-cash deployment, tax-loss harvesting, and prioritizing ISA accounts for rebalancing. Conduct a comprehensive year-end portfolio review and establish a clear 2026 investment plan.
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