As we close out 2024 and head into 2025, many investors are falling into the later camp above feeling that prices are too high, markets are destined for a down year and that they may have missed the boat if they were holding cash these past 12-24 months.
There is no shortage of market experts calling for an impending market crash. Mark covered this topic recently in a prior article found here.
Before investors go and alter their investment plans in 2025, they would be wise to look back at how well analysts and so-called "market experts" fared in 2024's predictions from last year:
So, markets are at all-time highs.... that's OK! We expect markets to consistently reach new highs. Dimensional Fund Advisors looked at data from US markets over nearly a century of returns and discovered that markets hitting a new high should not deter investors from getting into the market.
Everyone's crystal ball is cloudy looking into the future. We can always look back and see what we should have done, but not what we should do going forward. Because of this uncertainty with markets, investors would be wise to consistently hold a diversified portfolio of assets that can consistently capture returns across all markets when they do show up.
What do I mean by diversification?
The chart below illustrates how prices and earnings have grown over the past decade for US Large Growth and US Small Value stocks. Many would be surprised to see that US Small Value stocks as a group are trading at a cheaper valuation compared to ten years ago.
Prices do contain information about forward looking returns. Lower prices today tend to indicate a higher return going forward. Investors who are worried about the current valuations of the US stock market, and particularly US Large Cap Growth (tech stocks) may want to consider adding some Small Cap Value exposure to their portfolios. Yes, this would've detracted from overall performance over the past decade; however, investors should not be concerned with what "has" happened, instead they should look at what "could" happen going forward.
Looking outside the US stock market is another way that investors can reduce their concentration in certain stocks, sectors and the overall US market.
Another form of diversification is by holding enough in bonds and other alternatives to stocks so that an investor can ignore the market's short-term swings. Bonds still deserve a place in a portfolio as a means of helping investors control the overall risk they are taking. The illustration below shows average monthly returns for the S&P 500 index and US Aggregate Bond Index.
Investors may be nervous heading into 2025 given the recent rise in overall markets, especially here in the US. These concerns are valid and deserve the attention of any investor relying on their portfolio for income and living expenses over the coming years. We would encourage all investors to remember a few simple ideas as we turn the page into a new year:
A history lesson & a reminder for today's investors - 1954 was one of the single best years on record for the US stock market offering more than a 50% return for investors. 1955 was no slouch either as the market continued its strong performance leaving many investors wondering what the coming years had in store. History does not always repeat itself, but it can offer some insight into potential outcomes going forward. Investors who simply sat on their portfolios continued to compound their wealth at more than 11% to close out the decade.
This content is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. All opinions expressed are as of the date of publication and are subject to change without notice. Any historical, hypothetical, or backtested performance data referenced herein has inherent limitations: it does not represent actual client accounts or actual trading, is not reduced by advisory fees or other expenses that would apply to a real account unless stated otherwise, assumes reinvestment of dividends and other earnings, and was calculated with the benefit of hindsight. Actual results will vary, and past performance does not guarantee future results. The value of investments will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. References to specific securities, funds, or investment strategies are for illustrative and educational purposes only and do not constitute a recommendation to buy or sell any security. Not all recommendations will be profitable. Any testimonials or client comments referenced are not representative of the experience of all clients, are not indicative of future performance, and no compensation was provided in exchange for such statements. Information has been obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. Nothing herein is a solicitation or offer to buy or sell any security. Meredith Wealth Planning, LLC is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. For a full description of our services, fees, and any conflicts of interest, please review our Form ADV Part 2A and Form CRS at meredithwealth.com/disclosures.
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