2025 is full of uncertainties, but with the right strategy, it can also yield returns.

Written by: Suzanne Woolley, Bloomberg Businessweek

Translated by: Luffy, Foresight News

This year is full of uncertainties. The artificial intelligence narrative that has driven the U.S. stock market is now being questioned; there is little consensus on how a second Trump administration will affect the financial situation of ordinary Americans, and whether we will see inflation rise again, putting pressure on stocks and bonds. To help everyone find direction during this uncertain period, we consulted investment experts on some major questions investors face this year. While this year is fraught with risks, it could also bring returns if the right strategies are employed.

1. How likely is a significant drop in the S&P 500 this year? How should I prepare?

Michael Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan Asset Management, states that the S&P 500 has risen more than 20% each year for the past two years, a phenomenon that has only occurred 10 times since 1871. Cembalest expects the stock market to rise by the end of this year, but he also notes that there could be a drop of up to 15% during the year, which he points out is not uncommon. Over the past 100 years, the S&P 500 has dropped 10% or more in 60 of those years.

Given the potential volatility in the market, a better question is: when will you need this money? Each drop is followed by a new high, so if you can cash out in a few years, you won’t have a problem. Additionally, take a close look at your asset allocation. Simply holding the S&P 500 is not enough, as the top ten stocks (mostly tech stocks) account for about two-fifths of the index's market value, whereas in 2000, this proportion was only about one-quarter.

Ben Inker, Co-Director of Asset Allocation at GMO LLC, suggests a diversified investment approach by purchasing exchange-traded funds (ETFs) that track an equal-weighted version of the index, where each company accounts for about 0.2% of the value. He says, "In the long run, this is a good way to avoid getting overly caught up in any current investment craze."

2. Does the traditional 60/40 portfolio still make sense?

For a long time, financial planners have recommended a 60% stock and 40% bond portfolio, which has provided decent returns over the past few decades with much lower risk than holding stocks alone. However, the logic behind this portfolio (that bonds rise when stocks fall, and vice versa) completely broke down in 2022. With soaring inflation and aggressive rate hikes by the Federal Reserve, both stocks and bonds suffered. Recently, U.S. stocks and bonds have often moved in sync.

An increasing number of investment managers suggest allocating part of the 60/40 portfolio to so-called alternative assets—private securities that do not move in tandem with public market assets. Adding these assets may introduce new risks but could also enhance long-term returns. Sinead Colton Grant, Chief Investment Officer at BNY Mellon Wealth Management, states that companies are going public later in their lifecycle, meaning public market investors miss out on the higher returns achieved in earlier stages. "If you don’t have access to private equity or venture capital, you will miss opportunities." She believes that to replicate the performance of the 60/40 portfolio from the late 1990s, private securities should make up about a quarter of the portfolio.

Not everyone agrees with this view. Jason Kephart, Director of Multi-Asset Ratings at Morningstar, states that adding private assets to a 60/40 portfolio "increases complexity and costs, and there are questions about how to value them." He argues that the advantage of the 60/40 strategy lies in its simplicity, making "it easier for investors to understand and stick with the portfolio over the long term."

3. If I am risk-averse, is it worth investing in U.S. Treasuries? Will the bond vigilantes return?

Bond vigilantes are large investors who demand higher yields on government bonds to express their dissatisfaction with government overspending. While the details of the new government's spending plans are unclear, there are concerns that the U.S. budget deficit will worsen in the coming years, which could mean higher Treasury yields are on the horizon.

Currently, the yield on the 10-year Treasury bond is about 4.6%, close to an 18-year high. So should investors seize this opportunity? Leslie Falconio, Head of Taxable Fixed Income Strategy at UBS Global Wealth Management, states that until recently, the firm leaned towards locking in yields on five-year Treasuries. However, she believes that given UBS's expectation that economic growth will remain above trend but slow down, and inflation will decline, when the 10-year Treasury yield approaches 4.8% to 5%, it presents a good buying opportunity. As for the 30-year Treasury, she says, "Given the current volatility and policy uncertainty, we believe extending the investment horizon to 30 years at this yield level is not wise, as the risks do not justify the returns."

Of course, for those with high-yield savings accounts or one-year CDs, a 4.6% yield may not seem high, as these products can also offer similar returns. However, savings account rates can change at any time, and for CDs, there is no guarantee of receiving the same rate upon renewal after one year.

4. How can I protect my assets from rising prices?

President Trump has promised to "defeat inflation," but at the same time, he is pushing for higher tariffs and tax cuts, which could exacerbate inflation. Amy Arnott, a portfolio strategist at Morningstar, states that for investors in their 20s and 30s, rising prices may not be a major concern, as wages should keep pace with price increases over time, and stock values generally grow faster than inflation. Arnott believes, "Over the long term, stocks are one of the best hedges against inflation."

Those hoping to retire in the next decade might consider specialized inflation-hedging tools, such as commodities. Arnott notes that diversified commodity funds may include oil, natural gas, copper, gold, silver, wheat, and soybeans. Recently, few such funds have performed well, so if choosing one, Arnott suggests comparing the risk-adjusted returns of such investments rather than focusing on absolute performance.

For retirees or those planning to retire soon (who cannot offset inflation through salary increases), Arnott recommends purchasing Treasury Inflation-Protected Securities (TIPS) linked to the Consumer Price Index. She suggests buying 5-year and 10-year TIPS rather than 30-year ones, as the latter carries too much risk for those not planning to hold them to maturity.

5. Should I include cryptocurrency in my portfolio?

With a president who has launched a Memecoin and Treasury Secretary Scott Bessent disclosing (and selling) his holdings in a cryptocurrency fund, cryptocurrency appears to be becoming more mainstream. Investors can now purchase cryptocurrency ETFs, and billions of dollars have flowed into the iShares Bitcoin Trust (IBIT), which was established just a year ago, helping to drive Bitcoin prices up nearly 60% in the six weeks following the election.

However, the long-term outlook for cryptocurrency remains highly uncertain; for example, Bitcoin has recently pulled back. Therefore, some advisors suggest that investors who insist on adding cryptocurrency should keep their allocation below 5% of their portfolio; if nearing retirement, this percentage should be even lower. Matt Maley, Chief Market Strategist at Miller Tabak + Co., states that younger investors can allocate a slightly higher percentage to cryptocurrency, provided they balance the risk by investing in "cash-flowing, stable, and reliable companies." "You wouldn’t want to have 10% in Bitcoin and 90% in tech stocks."

6. Has the AI bubble burst?

The two-year bull market in AI stocks was hit hard in January, as the chatbot developed by startup DeepSeek forced investors to rethink some fundamental assumptions. DeepSeek stated that it could not obtain cutting-edge semiconductors, so it quickly developed a model using lower-cost chips, which, by some metrics, seems to compete with the models of U.S. AI leaders. On January 27, shares of Nvidia, which dominates advanced AI chips, plummeted 17%, wiping out $589 billion in market value, marking the largest single-day drop in U.S. stock market history.

The possibility that AI does not require expensive chips has raised questions about the valuations of Nvidia and U.S. AI giants. Analysts are closely examining DeepSeek's model to verify its claims and assess whether the U.S. AI boom has peaked. It is certain that China's progress in this technology is faster than many realize. Some investment managers see a glimmer of hope in DeepSeek, as if more companies and consumers can afford this technology, AI could have a greater impact. However, the high valuations of leading tech stocks have made some portfolio managers cautious about putting new money in, preferring to seek undervalued areas in the U.S. market, such as healthcare and consumer goods, or looking for better opportunities abroad.

7. How much will climate change impact my retirement plans?

The short answer: significantly. For the vast majority of retirees, home equity is their most valuable asset, especially if they have lived in their homes for decades and paid off their mortgages. Fully owning a home can provide security against housing costs, avoiding the uncertainty of rising rents in the future. However, with the increasing number of extreme weather events, the rising cost of homeowners insurance makes this logic seem less stable.

According to a study of over 47 million households, the average premium for homeowners insurance adjusted for inflation rose by 13% from 2020 to 2023. However, many major insurance companies are no longer offering new homeowners insurance policies for high-risk areas or are only providing limited coverage—especially in sunny coastal communities, where Americans often spend their retirement years. For example, in 2021, about 13% of voluntary homeowners and fire insurance policies in California were not renewed.

Clearly, an increasing number of seniors feel they have no choice but to forgo insurance due to cash shortages. According to the Insurance Information Institute, the proportion of Americans without homeowners insurance has more than doubled since 2019, reaching 12%. "This puts retirees in a bind," says Daryl Fairweather, Chief Economist at real estate brokerage Redfin, "They either face high monthly premiums that could rise quickly or risk losing their homes."

8. Will housing become more affordable in the short term?

Currently, the 30-year fixed mortgage rate is about 7%, which has pushed many homebuyers out of the loan market. Existing homeowners with old loans at rates of 3% or 4% have little interest in selling, as it would mean obtaining a new mortgage at today’s rates. Mark Zandi, Chief Economist at Moody's Analytics, states that due to the Trump administration's implementation of a series of policies that could lead to inflation, mortgage rates are unlikely to quickly fall back to near 6%.

The vacancy rate for lower-priced homes (under $400,000) is about 1%, close to historical lows. This suggests that both the residential sales and rental markets will continue to see high prices. Don’t expect new construction to meet demand, as immigrants (those facing deportation risks under the Trump administration) make up nearly one-third of the construction workforce, with about half lacking legal status. Zandi says, "Housing will remain unaffordable this year and for the foreseeable future."

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