Monthly Outlook: February 2025

Our 2025 Outlook made only one prediction: “Unpredictability.” And so far, we’re not wrong! Since the election, the stock market (S&P500) has zig-zagged about 4%, five separate times. Up, down, up, and so on.  But would it surprise you that the S&P500 is actually flat since the day after the November elections? In other words, it’s been a volatile, but mostly flattish, market for the past three months. Investors seem to be hanging on every newsflash, every tweet, and not really sure what’s real and what’s not. If history is any guide (and of course it is), flattish markets don’t last very long, and a clear direction will develop soon enough. But we’ve also learned from history that it’s best not to guess about market trends, and better to let the market show us. We’ll continue our vigilance and invest in uptrends for growth when we can, and sell downtrends for protection when we must. In this new era of market winners and losers, it’s quite possible we’ll end up being long some markets and out of others.

Given the unpredictability in the world and markets today, how can we be more resilient and able to endure the volatility? What do we mean by resiliency? One definition is “the ability to adapt to stressors, maintaining well-being in the face of adversity; toughness.” While we all may need to become more resilient in our personal lives, as your money manager, we’ll stay in our lane and consider three tips on investing with more resilience.

Diversification – Free Lunch

Please don’t skip over this paragraph thinking you’ve heard about diversification before. Nobel laureate Harry Markowitz famously stated that “diversification is the only free lunch” in investing. Most investors surely know this. But we repeatedly see investors that believe they’re diversified when they’re really not. Owning 20 or 30 stocks that are all in the Big Tech sector isn’t really diversification. Nor is owning four or five mutual funds that all invest in the same S&P500 core U.S. asset class.

Proper portfolio diversification – the kind that adds resiliency to fend off market volatility – includes investing in many asset classes and perhaps with different strategies within each asset class. Depending on the size of your portfolio, you might include a house, US and international bonds, US Growth, Value and Small stocks, International and Emerging market stocks, Commodities, REITs, and so on. Having a truly diversified portfolio, with asset classes that “zig” and “zag” at different times is prudent.

Keep the Voices Out of Your Head

The second tip is to turn off (or at least turn down) all the noise coming from TV, radio, blogs, podcasts, newsletters, and so on. Once you have thoughtfully and thoroughly developed your investing strategy and asset allocation, don’t let the “noise” derail you or rattle your resolve. Remember that many of these noisemakers’ goal is to make money by selling something – either advertising, subscriptions, or to enhance their own reputation. Of course, it’s good to be a lifelong learner and to remain open minded to new ideas, but adhere to your strategy. At most, make small changes and make them slowly.

Cut Your Losses Short – Don’t Stay Stubborn

Our final tip is to manage downside risk. This should be part of your overall investment strategy and should be well thought out long before you need protection. Too often, we see investors with a strong focus on growth, but no real plan to minimize losses during the inevitable drawdowns. Either they think that they must accept the ups with the downs, or they think they’ll magically know when to sell and lock in gains.

Most investors take the first approach, called “buy & hold,” but we think that exposes them to way too much volatility to get the long-term benchmark returns of, say, 8%/year. Plus, they tend to abandon buy & hold after large losses, when they just can’t “take it” any longer. Alternatively, some investors think they’ll sense a top (probably by listening to the “noise” per Tip #2, above). But this seldom works because they either sell too soon or too late using their “gut.”

We developed our iFolios strategy as a resilient, long-term approach to managing wealth. We build globally diversified portfolios, ignore the talking heads, and use a rules-based, trend following strategy to invest for growth & protection. Whatever 2025 brings, we know we’re ready.