Original article by Suzanne Woolley, Bloomberg Businessweek
Original translation: Luffy, Foresight News
This year has been full of uncertainty. The artificial intelligence narrative that has driven the U.S. stock market is being questioned; there is little certainty about how a second Trump administration will affect the finances of ordinary Americans, and whether we will see rising inflation again to weigh on stocks and bonds. To help everyone navigate these uncertain times, we asked investment experts for some of the big questions facing investors this year. While this year is full of risks, it can also bring rewards with the right strategy.
1. What is the likelihood that the SP 500 will fall significantly this year? How can I prepare for it?
Michael Cembalest, chairman of markets and investment strategy at JPMorgan Asset Management, said the SP 500 has gained more than 20% in each of the past two years, something that has only happened 10 times since 1871. Cembalest expects stocks to end the year higher, but he also said there could be declines of up to 15% in the interim, which he noted is not unusual. The SP 500 has fallen 10% or more in 60 of the past 100 years.
Given the potential volatility in the market, a better question is: When will you need the money? Every decline is followed by a new high, so if you can cash out after a few years, you wont have a problem. Also, take a close look at your asset allocation. Its not enough to just own the SP 500, as the top 10 stocks (mostly tech) account for about two-fifths of the indexs market value, compared to about a quarter in 2000.
Ben Inker, co-head of asset allocation at GMO LLC, said one way to diversify is to buy an exchange-traded fund that tracks an equally weighted version of the index, with each company accounting for about 0.2% of its value. “Over the long term, that’s a good way to not get too caught up in whatever investment frenzy is going on right now,” he said.
2. Does the traditional 60/40 portfolio still make sense?
Financial planners have long recommended a portfolio of 60% stocks and 40% bonds, which has provided good returns over the past few decades with far less risk than holding stocks alone. However, the logic behind this combination (that bonds will rise when stocks fall and vice versa) has completely failed in 2022. As inflation soars and the Federal Reserve raises interest rates aggressively, both stocks and bonds have suffered. In recent times, U.S. stocks and bonds have even often moved in sync.
A growing number of investment managers recommend allocating a portion of the 60/40 portfolio to so-called alternative assets — private securities that don’t move in sync with public market assets. Adding these assets could introduce new risks, but they could also improve long-term returns. Companies are going public later and later in the cycle, which means public market investors are missing out on the higher returns that companies get at their early stages, said Sinead Colton Grant, chief investment officer at BNY Mellon Wealth Management. “If you don’t have access to private equity or venture capital, you’re missing out.” To replicate the performance of the 60/40 portfolio in the late 1990s, she believes, private securities assets should account for about a quarter of the portfolio.
Not everyone agrees. Jason Kephart, director of multi-asset ratings at Morningstar, said adding private assets to the 60/40 mix adds complexity and fees, and there are some questions about how its valued. He said the beauty of the 60/40 strategy is its simplicity, making it easier for investors to understand and stick with it over the long term.
3. If I am risk averse, are US Treasuries worth investing in? Will the Bond Guardians return?
Bond defenders are large investors who demand higher yields on Treasury bonds to express their displeasure with excessive government spending. While details of the new administrations spending plans are unclear, concerns that the U.S. budget deficit will worsen in the coming years could mean higher Treasury yields are coming.
The current 10-year Treasury yield is around 4.6%, close to an 18-year high. So should investors take this opportunity? Leslie Falconio, head of taxable fixed income strategy at UBS Global Wealth Management, said that until recently, the firm preferred to lock in the yield of the five-year Treasury. But she believes that given UBSs expectations that economic growth will remain above trend but slow, and inflation will fall, it is a good buying opportunity when the 10-year Treasury yield approaches 4.8% to 5%. As for the 30-year Treasury, she said: Given the current volatility and policy uncertainty, we do not think it is wise to extend the investment period to 30 years at this yield level, and the risk is not proportional to the reward.
Of course, a 4.6% yield may not seem like much to someone with a high-yield savings account or a one-year term deposit, which can offer similar returns. But savings account rates can change at any time, and with term deposits, there’s no guarantee you’ll get the same rate when you renew your term deposit after a year.
4. How can I protect my assets from rising prices?
President Trump has pledged to beat inflation, but at the same time he is pushing for higher tariffs and tax cuts that could stoke inflation. For investors in their 20s and 30s, rising prices may not be a major concern because wages should keep up with price increases over time, while stock values generally increase faster than inflation, said Amy Arnott, portfolio strategist at Morningstar. Over the long term, stocks are one of the best hedges against inflation, she said.
Those looking to retire within the next decade could consider specialized inflation hedges, such as commodities. Arnott said a diversified commodity fund might include oil, natural gas, copper, gold, silver, wheat and soybeans. Few such funds have performed well recently, so if choosing one, Arnott recommends comparing the risk-adjusted returns of such investments rather than focusing on absolute performance.
For retirees or those planning to retire soon (who can’t get a pay raise to offset inflation), Arnott recommends buying Treasury Inflation-Protected Securities (TIPS), which are tied to the consumer price index. She recommends buying five- and 10-year TIPS, rather than 30-year ones, which are too risky for people who don’t plan to hold them to maturity.
5. Should I include cryptocurrencies in my portfolio?
With a president who launched Memecoin in office and Treasury Secretary Scott Bessent disclosing (and selling) his cryptocurrency fund holdings, cryptocurrencies are looking increasingly mainstream. Investors can now buy cryptocurrency ETFs, and billions of dollars have poured into the one-year-old iShares Bitcoin Trust (IBIT), helping to drive the price of bitcoin up nearly 60% in the six weeks after Election Day.
Yet the long-term outlook for cryptocurrencies remains extremely uncertain; Bitcoin, for example, has retreated recently. As a result, some advisers say investors who insist on adding cryptocurrencies should keep their positions to less than 5% of their portfolios; even less if they are near retirement age. Matt Maley, chief market strategist at Miller Tabak + Co., said younger people can have a slightly higher percentage of their investments in cryptocurrencies, but only if they balance the risk by investing in stable, reliable companies with good cash flow. You dont want to be 10% in Bitcoin and 90% in tech stocks.
6. Has the AI bubble burst?
A two-year bull run in artificial intelligence stocks took a hit in January after a chatbot developed by startup DeepSeek forced investors to rethink some basic assumptions. DeepSeek said it didn’t have access to the most advanced semiconductors, so it used less expensive chips to quickly develop a model that, by some metrics, appeared to compete with the models of U.S. AI leaders. On Jan. 27, Nvidia Corp., which dominates advanced AI chips, saw its stock price plunge 17%, wiping out $589 billion in market value, the biggest one-day drop in U.S. stock market history.
The possibility that artificial intelligence doesn’t require expensive chips has raised questions about the valuations of Nvidia and U.S. AI giants. Analysts are poring over DeepSeek’s model, trying to validate its claims and gauge whether the U.S. AI boom has peaked. To be sure, China is making faster progress on the technology than many thought. Some investment managers see a glimmer of hope in DeepSeek, because AI could have a bigger impact if more companies and consumers can afford the technology. However, high valuations for leading tech stocks have made some portfolio managers wary of committing new money, favoring undervalued sectors of the U.S. market, such as health care and consumer products, or looking for better opportunities abroad.
7. How much impact will climate change have on my retirement plans?
The short answer: A lot. For the vast majority of retirees, home equity is the most valuable asset they hold, especially if they’ve lived in it for decades and paid off their mortgage. Owning your home outright provides protection against housing costs and the uncertainty of future rent increases. But as the number of extreme weather events increases and the cost of home insurance continues to climb, that logic seems to be on shaky ground.
The average premium for homeowners insurance rose 13% between 2020 and 2023, adjusted for inflation, according to a study of more than 47 million households. But many major insurers are no longer offering new homeowners policies or are offering only limited coverage in high-risk areas — particularly in sunny coastal communities where Americans often spend their twilight years. For example, about 13% of voluntary home and fire insurance policies in California were not renewed in 2021.
Apparently, more seniors are feeling like they have no choice but to forgo insurance because they’re strapped for cash. The percentage of Americans without home insurance has more than doubled since 2019, to 12%, according to the Insurance Information Institute. “That puts retirees in a difficult position,” said Daryl Fairweather, chief economist at real estate brokerage Redfin. “They can either shoulder high monthly premiums that could rise quickly, or risk losing their home.”
8. Will housing become more affordable in the short term?
The current 30-year fixed mortgage rate is around 7%, which has squeezed many homebuyers out of the loan market. Existing homeowners who hold old loans with interest rates of 3% or 4% have little interest in selling because it would mean getting a new mortgage at todays rates. Mark Zandi, chief economist at Moodys Analytics, said mortgage rates are unlikely to fall back to levels close to 6% anytime soon because the Trump administration is pursuing a series of policies that could lead to inflation.
The vacancy rate for lower-priced homes (less than $400,000) is about 1%, near historic lows. That portends that prices will remain high in both the residential sales and rental markets. Don’t count on new construction to meet demand, as immigrants (those at risk of deportation under the Trump administration) make up nearly a third of construction workers, and about half of them are undocumented. “Housing will remain unaffordable this year and for the foreseeable future,” Zandi said.
