The S&P 500 ended the year near all-time highs, posting a 2.4% total return in the fourth quarter.
While central banks continued to cut short term interest rates in the fourth quarter, long term interest rates ticked higher as investors digested the potential for inflation to reaccelerate and tighter monetary policy in the near future.
Market conditions increasingly support our emphasis on maximizing portfolio diversification with a goals-based investing approach.
Economic and Market Update
The U.S. economy remains on stable footing and continued to grow through the third quarter of 2024 despite market participant’s relentless calls for a recession over the past 24 months. For instance, on an inflation adjusted basis the economy is expected to have grown 2.4% year-over-year in the fourth quarter (shown by green line in the chart below), per data from the Atlanta Federal Reserve. The main drivers of the continued growth have been favorable fiscal stimulus, the Federal Reserve’s interest rate cuts, and strong consumer and investment spending.
We believe economic momentum will continue as we progress through 2025. Yet, we are closely monitoring inflation metrics for signs of potential reacceleration. While the Federal Reserve issued its third interest rate cut in December as a result of inflation subsiding substantially from its peak levels experienced in 2022, this easing of monetary policy poses risk for inflation to reaccelerate and potential tighter monetary policy in the future. In addition, geopolitical risk overseas and President-elect, Donald Trump’s proposed tariffs and reduced immigration policies pose further potential for inflation to reaccelerate.
Every Part of the Journey Matters!
As we embark on the new year, we find it important to recognize that the pursuit to achieve your unique financial goals is a journey, much like going a road trip. Generating strong risk-adjusted investment returns is certainly part of the journey, although maximizing your probability of reaching your destination more importantly comes down to the actions that both you and your advisor take throughout the journey.
Those who are the most successful in reaching their financial destinations most commonly have carefully constructed financial plans to get there. On average, investors who start their journeys with a financial plan end up reaching their destination with a net worth that is nearly three times higher than those who embark on their journeys without a plan[1].
Throughout the remainder of this letter, we have highlighted a handful of tactics we employ each day to help you achieve your goals, along with additional financial planning considerations that we are optimally equipped to assist you with.
We Recognize When to Tap the Breaks
If you drive a car, it is certain that you have experienced a fair dose of reckless drivers and those that have a need for speed. Maybe there have even been times when you were the speeder, driving 15 MPH over the limit down a country road in a rush to not be late to your destination. I suspect that most of us have been there at least one time or another.
As many people naturally enjoy the left-hand lane and speeding past others on the highway, it is no surprise that investors and financial markets behave in a similar fashion. In other words, “speeders” are those who fail to manage risks along their journey to achieve a certain financial goal faster by exposing themselves to outsized risks they may not even be aware of. The risk is that they never end up reaching their destination. In many cases, only a small percentage of these financial market speeders get lucky and reach their destination while many just end up back at square one.
A diligent driver recognizes when they are speeding and when it is time to slow down. Similarly, it takes patience and investment diversification to minimize exposure to risks and maximize the probability of reaching your destination. At times when financial markets (or even parts of them) have gone too far too quickly, re-balancing is key. For instance, large-cap growth stocks, which largely consist of mega-cap technology companies, have drastically outperformed long-term average returns for stocks which is typically mid-to-high single digit annual returns.
Outperformance of large-cap growth equities has led to high levels of concentration risk in many portfolios we review. For instance, the weighting of the top-10 stocks in the S&P 500 is the largest in 35 years due to years of outsized appreciation of the large cap growth stocks in the index, most of which currently trade at historically elevated valuations. This has come at a time when investors are the most bullish on the 12-month outlook for stocks in over a generation.
Considering this, market expectations, and the broader economic backdrop, we remain convicted that diversification is a major benefit, not hindrance in portfolio construction. As a client of RISE Investments, your portfolio is re-balanced regularly and managed to have exposure beyond just 10 companies to take advantage of broader opportunities, while also reducing concentration risk.
We see equity opportunities within mid-sized, small-sized, overseas and dividend paying companies. Additionally, fixed income serves a useful role in portfolio construction to reduce risk and generate cash flow. Most importantly, your investment portfolio allocation remains tailored to your specific objectives, risk tolerance, and time horizon.
We Recommend Stopping to Take a Break at the Rest Area
Driving continuously on a long cross-country road trip requires a usual pit-stop to refresh and stretch the legs. Factors can often change unexpectedly on a journey, such as unforeseen traffic, foul weather, and detours. In some cases, unexpected changes like this can justify making modifications to your route. Regular pit-stops are great opportunities to pull up Google maps (or perhaps the old paper map if that is what you prefer) to make sure you are on the best route to your destination.
In the financial world, a well-constructed financial plan serves as your roadmap to help you understand where you are today, and the best route to follow to achieve your long-term financial goals. If you have not ever done so, we recommend working with your RISE advisor to construct a financial plan and to make “pit-stops” at the start of each new year to revisit your plan with your advisor and ensure you remain on the best route to your destination.
Material changes to your family’s priorities or financial situations, such as an upcoming home purchase, change in employment or income, or a new child are a few of many factors that can impact your financial plan and justify a conversation about making sure you are on track to achieve your goals. A financial plan is not considered a “set it and forget it” document. Rather, the most productive plans are living and breathing roadmaps that are revisited regularly as your circumstances evolve.
We Help to Minimize Tolls
Currently, tolls in the United States exist in 36 states as a popular way for states to generate revenue. Tolls were implemented in the years following President Dwight Eisenhower’s expansion of the Interstate Highway System in 1956. The expectation was that tolls would be a temporary measure to help finance the build-out of America’s Interstate Highway System and would eventually be phased out. Popular campaigns in the 1960’s and early 1970’s such as “Toll Free in ’73” were promoted by state politicians to eliminate the tolls. Sadly, this “tax” remains for drivers today.
Nobody enjoys unnecessary taxes or tolls. In our financial lives, maximizing tax efficiency is an important element in maximizing the after-tax growth of your wealth. We take pro-active actions to reduce your tax burden throughout your financial journey. Actions we take to help minimize your tax burden include but are not limited to:
Tax-smart implementation of your investment strategy throughout your taxable and tax-advantaged accounts
Tax-loss harvesting strategies to minimize realized capital gains
Advice regarding Roth IRA conversions, tax planning for employee stock compensation, and tax-advantaged or tax-free savings plans, including Traditional and Roth IRAs, 401(k)s, 403(b)s, and 529 College Savings plans
Qualified Opportunity Zones
Gifting strategies
Do Not Forget to Manage Your Non-Investment Financial Risks
One of the most nerve-racking experiences a motorist faces is when sirens turn on and flashing red and blue lights appear in your rearview mirror. Thoughts spiral through your mind…Did I roll thru a stop sign? Was I going too fast through a construction zone? Once the officer comes up to your window, he or she will state the infamous phrase “license and registration please.”
Similar to drivers being required to maintain auto insurance to protect both themselves and others from excessive financial liability, it is of utmost importance not to forget to protect your family, assets, and legacy from unforeseen risks. Your estate consists of everything you own, such as your car, home, other real estate, bank accounts, investments, jewelry, personal possessions, and life insurance. There is one thing in particular that each of us have in common - we cannot take our possessions with us when we are deceased. Estate planning can let you rest assured that you are not setting up your family to have to pick up the pieces when you are gone. Some common benefits of a prudent amount of estate planning are:
A seamless and tax-efficient transfer of your assets to your family that minimizes or eliminates court costs and unnecessary legal fees.
Being able to continue providing to your dependents financially after you are gone, including providing to any dependents who may be too irresponsible with money to be gifted a lump-sum inheritance.
A structured plan for your care if you become incapacitated before you die.
In the event you become subject to disability or extended illness, a financial arrangement for your family to be able to care for you without burdening other financial affairs.
Conclusion
Markets and trends consistently go in and out of favor. We are convicted that a prudent risk management strategy is most appropriate at this juncture, most notably by incorporating robust portfolio diversification both within and between asset classes. As we know, with risk can come reward. While risks are a certain, the reward is most commonly far from a guarantee and is dictated by how you plan for, and manage, the risks.
Footnotes and Disclosures
Source: Strategic Business Insights MacroMonitor 2020-2021 report.
*RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any historical returns, expected returns, or projections are provided for informational purposes only. The description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information.