Market Shifts and New Policies: Is Your Portfolio Ready for the Rest of 2025?
A new presidential administration is already at work, shaping policies that will have broad economic implications. These changes are unfolding in an environment that looks very different from just a year ago. Interest rates have shifted, inflation is on a different trajectory, and markets are adjusting. If you haven't revisited your portfolio's positioning, now may be a good time. The strong equity markets of 2024 may have led to outsized positions that no longer align with your risk tolerance, and new opportunities or risks could call for adjustments.
Are You Diversified?
Historically, equities and bonds have tended to move in opposite directions. When one drops, the other often provides a buffer. This relationship has helped investors manage risk for decades, but it doesn't always hold. Some environments, like 2024, see stocks and bonds rising together. In others, especially when inflation, interest rates, or volatility spike, both can decline at the same time, which can leave investors more exposed than they expected.
A good starting point is assessing how well your portfolio is truly diversified:
Are you spread across different geographies, sectors, and industries?
How many individual positions do you hold? Mutual funds can provide broad exposure, but if you're heavily invested in individual stocks or concentrated in your company’s stock, you might have more risk than you think.
Are you diversified by strategy? Growth and value stocks tend to perform differently in various market cycles. Having both can add balance.
Have you considered different market capitalizations? Large-cap, mid-cap, and small-cap stocks each have different risk-return dynamics.
Do you own assets that are not correlated to the stock and bond markets? Real estate, commodities, private equity, and private credit can all offer diversification benefits.
If market moves have thrown your portfolio off balance, whether through overconcentration or drift in asset allocation, it may be time to rebalance. A strategy that incorporates tax-loss harvesting can help manage the tax impact while repositioning your investments.
Tax-Loss Harvesting and Re-Deploying Cash
Once you have identified areas where your portfolio needs adjusting, the next step is deciding what to sell. Tax considerations can make a big difference:
The IRS has a specific hierarchy for offsetting gains with losses. Short-term losses apply to short-term gains first, and long-term losses apply to long-term gains. If losses exceed gains in either category, they can be used to offset the other.
If you are selling shares acquired at different times and prices, look at cost basis options to minimize taxes. Selling higher-cost shares first can help maximize tax benefits.
Once you have sold, how do you redeploy the cash? With the new administration's policies taking shape, markets may remain volatile as investors react to legislative priorities and economic shifts. Rather than reinvesting all at once, dollar-cost averaging, investing a fixed amount at regular intervals, can help smooth out market fluctuations and avoid poor timing decisions.
Cash is Still Earning a Decent Return
Even though interest rates have come down, some CDs and high-yield savings accounts are still offering competitive returns. This may lead investors to wonder whether cash should play a bigger role in their portfolios.
The better question is what role cash should play.
If you are still working, it is wise to keep three to six months of living expenses in cash. Think of it as an insurance policy rather than an investment.
If you are retired, keeping three to five years' worth of expenses in cash can provide a buffer during market downturns, reducing the need to sell investments at inopportune times.
Beyond these amounts, it generally does not make sense to over-allocate to cash at the expense of higher-growth assets. However, if you are still holding cash in an account paying near zero, it is worth exploring better alternatives.
The Bottom Line
Strong markets provide opportunities to build wealth, but keeping those gains requires a thoughtful approach. Reviewing your portfolio’s diversification, risk exposure, and cash positioning can help ensure you are well-positioned for whatever 2025 brings. The start of a new political cycle and shifting economic conditions are likely to create market volatility, but with the right strategy, you can stay on track. Now is the time to assess, adjust, and make sure your portfolio is working for you.
