
A new year brings fresh challenges and opportunities for your portfolio. A new presidential administration will shape policy amidst a changed inflation and interest rate environment, and that means the short-term positioning of your portfolio may need adjustment. Combine this with the equity market’s strong performance last year, and your portfolio might have drifted beyond your intended risk parameters.
How can you prepare your portfolio to help meet both your immediate and long-term goals—all while keeping peace of mind?
Are You Diversified?
Diversification has always been a cornerstone of effective investing. Historically, equities and bonds have been negatively correlated, with one often balancing the other. When stocks rise, bonds may fall, and vice versa. This relationship creates a natural buffer in your portfolio.
But what happens when they move in tandem, as they occasionally do? Recent years have shown that inflation, sharp interest rate changes, or heightened market volatility can send both asset classes down simultaneously. This disrupts the cushioning effect you might rely on.
Ask yourself these questions to assess your diversification:
- Are you diversified across geographies, sectors, and industries?
- Do you hold enough positions to reduce concentration risk? (Mutual funds often provide this, but individual stockholders or those heavily invested in their company’s stock may be too concentrated.)
- Are you balancing different strategies, such as growth and value investing?
- Are you considering the full range of market capitalizations—large-cap, mid-cap, and small-cap stocks?
Additionally, consider alternative investments like real estate, commodities, private equity, or private credit, which may not correlate with public markets and can add valuable diversification to your portfolio.
Finally, have market moves skewed your allocations? If some positions have grown disproportionately or fallen below target, a rebalancing strategy that includes tax-loss harvesting may be in order.
Tax-Loss Harvesting and Redeploying Cash
Rebalancing your portfolio often involves selling positions that no longer align with your target allocations. If you plan strategically, this process can also reduce your tax bill.
Here’s how to approach it:
- Use the IRS’s hierarchy: Short-term losses offset short-term gains, and long-term losses offset long-term gains. Excess losses can also be carried over.
- When selling shares purchased at different times and prices, prioritize selling high-cost-basis shares to maximize tax benefits.
After selling, redeploying cash wisely becomes critical. Markets are likely to remain volatile as the new administration’s priorities come into focus, creating potential swings. Instead of reinvesting all at once, consider dollar-cost averaging—investing a fixed amount at regular intervals. This strategy can smooth out volatility and help you avoid poorly timed decisions.
Cash: A Key Part of Your Investment Strategy
Cash may not be glamorous, but it plays a crucial role in your financial strategy. While interest rates have moderated, some savings accounts and certificates of deposit (CDs) still offer meaningful returns. But how much cash should you hold?
If you’re still working: Aim to have 3–6 months of living expenses in cash. Think of this as your insurance policy for life’s unexpected expenses.
If you’re retired: Consider holding 12–18 months of living expenses in cash. This buffer can help you avoid withdrawing from investments during a market downturn, giving your portfolio time to recover.
While cash is essential, pulling too much out of higher-growth assets can limit your long-term returns. Instead, focus on optimizing where your cash is held. If your savings account pays near-zero interest, explore alternatives that offer better returns without sacrificing liquidity.
The Bottom Line
A strong market year can put you ahead on your financial goals—but keeping those gains requires thoughtful planning. Reviewing your portfolio, adjusting risk levels, and refining your strategies now can set you up to weather whatever 2025 has in store.
Taking the time to tune your portfolio can help you stay balanced, resilient, and positioned to ride out market volatility with confidence.