Monthly Outlook: January 2025

This is the time of year when we all reflect on the past, ponder the future, and make promises and plans, some of which we’ll keep. Wall Street, similarly, can’t help themselves in making predictions and forecasts, most of which will be wrong, based on history. We all know this, factually, but investors still hang on every word, especially if it agrees with our own view. If TV news would put the forecaster’s actual track record below their on-screen image, we’d surely turn off the TV. But forecasters are rarely held accountable, so the fascination continues.

2025 will be unpredictable for many reasons, especially with Trump in the White House. That’s not a political statement, it’s just an observation of his operating style. Will he deport millions of people on Day One? Will he slash $trillions from the budget? Will he buy Greenland? Many other countries are going through political change, too, from Canada to Germany to France to Taiwan, and so on. Parts of the world economy are struggling already, and some parts, like Big Tech, are thriving. There will be more divisions of winners and losers, in all respects. As Rumsfeld would have said, there are so many unknown unknowns in the years ahead.

There is a better way to move forward than relying on predictions. We can assess the range of possibilities, and be prepared for them, even if we don’t know how they’ll unfold. We don’t want to be perma-bulls or perma-bears, just perma-aware. It’s sort of the Boy Scout approach: Be prepared.

Range of Opportunities

In 2024, Big Tech dominated the news and made most of the gains. The “Magnificent 7” (Apple, Google, Microsoft, Amazon, Nvidia, Tesla, Meta) are so large now that they comprise 32% of the whole S&P500. Not only are they huge companies, but they are also the stocks that performed best, contributing about 57% of the S&P500 returns in 2024. It’s an amazingly concentrated U.S. stock market today, and an historical extreme.

As for the other 493 stocks in the S&P500, there are good opportunities in many sectors: Financials, Consumer, Healthcare, and so on. It’s possible that we’ll see investors look beyond the “Mag 7” in 2025 and these other sectors will start to outperform.

International stocks comprise about 35% of the world’s stock market and they should be considered, too. Yes, they’ve underperformed US stocks for many years and they might again, in 2025. But they’re far cheaper than U.S. stocks and someday, they could outperform when we least expect it.

Bonds have traditionally been a stabilizing investment in portfolios, providing interest and return of principal at maturity. But much of their benefit comes from falling interest rates, like we’ve mostly experienced since 1983. Due to deficits and debt, might we now be in an era of flat-to-rising interest rates? Or maybe rates will just move sideways in a volatile range? Bonds are still an important part of a diversified portfolio, but they’ll need to be managed more closely.

So Don’t Predict – A Better Way

We don’t need predictions and forecasts to be successful. Instead, we need to be prepared and to be disciplined. This is the essence of our firm’s iFolios strategy. We consider the range of investment opportunities and build globally diversified portfolios using low-cost index ETFs. We determine an asset allocation range for each index ETF, based on historical correlations and benchmark weightings. So far, this is “Investing 101” that any good money manager should be doing.

Our special “value add” is iFolios, a systematic, rules-based, trading system that we created to know when to be fully invested for growth and when to sell to reduce losses during downtrends. It’s a trend-following strategy and it’s unemotional and disciplined. Furthermore, it doesn’t rely on predictions or forecasts at all. It allows us to invest more aggressively for growth, knowing that we always have a loss-prevention strategy in place. It’s analogous to driving fast with brakes; or rock climbing with ropes.

As we move into 2025, we’re fully invested in those index ETFs that are trending higher: U.S. Stocks, and short- and mid-term bonds. We’ve sold the index ETFs that are downtrending: international stocks. We’re prepared for anything in 2025, without any predictions. Happy new year!