As we close the chapter on 2024 and enter 2025, I want to share thoughts for the upcoming year when it comes to 2025 portfolio positioning through various asset classes. We will look at each asset class and elaborate on how you may want to position your portfolio and how I plan to allocate in 2025.
Inflation Effects for Your 2025 Portfolio
Inflation has played a significant role recent, with the U.S. inflation rate averaging around 3.5% throughout 2024, down from the peaks seen in 2022-2023. The Federal Reserve’s monetary tightening in prior years succeeded in bringing inflation closer to its 2% target, but inflation in rent and services are still more than 4%.
In 2025 JPM predicts that inflation could rise back to 2.7%, assuming continued growth in GDP in the US, lower tax rates from the Trump Administration, and potential inflationary effects from tariffs. Trading Economics sees inflation around 2% to 2.5% throughout 2025, whereas Apollo sees inflation risk ramping back up in the coming years, mirroring the 1970s level of inflation after the Fed has cut the Fed Funds Rate in their final FOMC meeting.
This stubborn nature of inflation introduces downside risk of the 60/40 portfolio allocation in 2025 similar to what happened in 2022 according to Apollo. An allocation to real assets and inflation-resistant securities will remain crucial components of any diversified portfolio. Investors should seek some form of exposure to inflation linked investments for the short term and long term. For more on inflation resistant securities, check out a recent post on I Bonds for 2025.
Asset Class Allocation Strategy for Your 2025 Portfolio
Public Equities
Public equities delivered strong returns in 2024, fueled by steady corporate earnings and multiple expansion due to AI-driven productivity buzz. However, equity markets now face valuation pressures, as returns on AI investments are expected to begin to show and valuation multiples are the highest they have ever been. On the other hand, there is lots of pro-business sentiment for the US economy with the second term of the Trump Administration.
How you may want to position:
- Those still accumulating wealth should continue to broadly diversify with US equities and continue to invest for the long term. I believe the broader market will do well as investors move into equities to benefit from the pro-business economic environment.
What I am doing:
- I plan on buying more international equities to diversify my portfolio, I feel like the concentration for the S&P 500 is too heavily weighted towards the Mag 7 for my liking.
- I plan on building slight concentration in 2-3 companies that I believe will over perform for my intended investment horizon. I want to ensure that no concentrated position is built with more than 10% of my overall portfolio/net worth.
Bonds
The bond market in 2024 offered higher yields, with the 1-month and 3-month yields being +5% for most of the year. As inflation eases and the Fed lowered rates and shorter duration bonds become less attractive. Bonds still remain an attractive option for portfolio stability but will be providing lower yields.
How you may want to position:
- Unless there is a need for capital, short term bonds are not ideal right now. New bonds with longer duration (bonds that have 1-year maturities or greater) are attractive right now with treasuries. Even after the Fed rate cut, the 5-year and 10-year yield is even higher.
- JPM sees the Fed cutting rates more to a terminal interest rate of 3.5%. However, with the last FOMC meeting and CPI read of 2024, higher duration rates are trading at higher yields. Exposure to floating rate debt and high-yield debt investments that have good credit quality is a good idea for 2025.
What I am doing:
- For my financial goals in 2025, I want to be liquid to buy my primary residence. If I have excess capital for credit investing, I am going to buy 5-year or 10-year treasury bonds with the intent to hold to maturity.
Cash
Cash served as a valuable tool for yield in 2024, with money market funds and HYSAs yielding over 5% for much of the year. While yields have declined by end of 2024, in 2025 cash remains a defensive allocation.
How you may want to position:
- At the bare minimum, ensure you have your emergency fund set aside for your age and lifestyle needs. Make sure to be earning the basic HYSA rate.
- If you are stocking up on cash in excess of your emergency fund, it should be for a down payment or a big life event within the year, keep that cash in a HYSA.
What I am doing:
- For my financial goals in 2025, I want to be liquid to buy my primary residence. I am going to stockpile cash in a HYSA until I complete that purchase and have the necessary emergency reserves to service the mortgage for 3-6 months.
Real Estate
Real estate experienced a mixed year in 2024, with residential markets stabilizing and commercial real estate facing headwinds due to higher borrowing costs. In 2025, real estate’s performance will hinge on regional trends, the cost to borrow, and market inventory which have all been unfavorable in recent years.
How you may want to position:
- There are different ways to be a real estate investor, as it is a more deal specific asset class. The easiest exposure to real estate is REITs, but if you want to have direct ownership, starting with a long-term investment is your best option to get that exposure.
- Either owning your own home and renting a room or two is a great way to get started. If you are expanding past that, it’s up to the effort level you want to have.
What I am doing:
- I am saving to buy my own home, and once I own where I live, I intend to rent out room(s) to supplement my income. I also want to invest in other real estate assets that I will share my experience with in 2025.
Alternatives
Alternative assets, including private equity, commodities, private credit, crypto, and hedge funds, gained traction in 2024 as institutional and high net worth investors sought diversification and uncorrelated returns. This is an incredibly hard asset class to get into if you do not have capital.
How you may want to position:
- If you cannot access this asset class traditionally, build something that you are interested in and market it. You can sell it or start building your portfolio of alternatives.
- If you have higher accessibility to the asset class, deal making should ramp up with declining rates and the new economic environment, I aim for a 70/20/10 alternative portfolio of private equity, private credit, and commodities respectively.
What I am doing:
- I want to work on turning my “projects” into more serious businesses. Starting with Portfolio Literacy, I am going to turn it into a real business in 2025. Check this post out for the upcoming improvements to Portfolio Literacy in 2025. More details on my other projects are to come in 2025.
- I am really interested in the proposed ETF from Apollo and State Street, depending on what the distributions and expected yields are, I will see if I want to include it in my portfolio when it becomes available. I want to get exposure to more private credit investments opportunities.
Final Thoughts on 2025 Portfolio Positioning
Positioning your portfolio for 2025 requires a thoughtful balance of you goals and adaptability to a new economic environment. As markets evolve and economic trends shift, staying aligned with your financial goals will be key to navigating the year ahead. Remember, successful portfolio management is not about predicting the future but about staying committed to a strategy that supports your objectives. As always, individual circumstances and risk tolerance should guide allocation decisions. A trusted financial advisor can help tailor these strategies to your unique needs. Here’s to a prosperous and well-positioned 2025!