At the start of a new year, it's a good time to take stock of your financial situation with an eye on the future. Nothing beats being prepared for the market's ups and downs or unforeseen life events. That's where a few smart money resolutions can come in handy to help you navigate 2025.
"There's a tendency to get attached to results, especially if you've had a good year in the market. And we've really had two good years in a row," said Joseph Boughan, CFP and founder of Parkmount Financial Partners. "So there are a couple of mental biases that people can get lured into when the market's been doing so well."
For 2024, the S&P 500 is up more than 25%, while the Nasdaq composite has surged more than 30%. The Magnificent Seven megacap stocks that include Microsoft, Apple and Facebook owner Meta Platforms comprise nearly 30% of the S&P 500. Those three also make up nearly a quarter of the Nasdaq composite.
So it should come as no surprise that those stocks have been the main drivers of index performance in recent years. As such, many investors' portfolios might be overly concentrated in a few stocks, potentially elevating their overall portfolio risk.
Boughan says investors need to avoid two mental traps to make the most of their money resolutions. First is the fear of missing out, or FOMO, mentality. Second is thinking that the market is going to go up forever.
What about FOMO? If a specific investment is up 300%, they might not think about the increasing risks that come from holding that position, he said. In addition, a sense of complacency might make them not mentally prepared in case of a correction. They could become vulnerable to making a mistake when that happens.
Moneymaking Financial Resolutions
To avoid these traps, it can be beneficial to put the review of your portfolio at the top of your New Year's money resolutions.
"Resolutions are a way to take ownership of your finances," said Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.
Read About Retirement Planning Strategies for 2025
So, investors have a choice. They can "take small steps, whether it's resolutions or getting a financial plan to get more control," he said. "Or, the alternative, unfortunately, for many is their finances may control them."
He points out that planning is a yearlong activity, but an investor needs to be resolved to take at least small steps to look at income, expenses, savings and investments.
In addition, it's important to take emotions as much as possible out of financial decisions.
Take notice of how you're "reacting to the inevitable emotions of things like the recent election, or markets that can move from day to day," he said. "Am I doing it in an emotional way or am I doing so with a plan?"
Rebalance Your Portfolio, Avoid High Fees
Other portfolio decisions include rebalancing, looking at fees and taking action to bring it back in line with one's goals.
While fees have come down significantly in the past decade or two, there can still be many hidden or otherwise less obvious expenses. Those can eat into your return. You might be lost about how to calculate a weighted average fee of your portfolio. It might be handy to hire an hourly fee-based financial advisor, said Joe Marquez, wealth advisor and co-CEO at Bolin Creek Wealth Advisors.
In just a couple of hours, you could find out not just how much your portfolio is costing you, but also get the right investment diagnostics and review of your current allocation, he explained.
"It's a good number (portfolio fee) to know," he said. "It's less expensive now to put together a really well thought out, broadly diversified investment portfolio. But there are still expense ratios that are higher than the average."
So, the key is to understand: "I'm paying more than average, am I OK with that?" said Marquez.
An overlap of funds can also bring a portfolio out of balance.
"Just because you own five or 10 or 30 different funds doesn't mean you're diversified if many of these funds own the same stocks," he noted.
Rebalancing a taxable portfolio brings about tax consequences. So, investors are advised to work with a financial or tax professional to understand those.
How To Save Money With Smart Tax Strategies
But taxes can work in your favor.
Tax-loss harvesting is a known tactic to sell underperforming stocks at year-end (through Dec. 31) to capture tax savings against other capital gains. These stocks or funds can then be purchased back after a waiting period of 30 days. If you buy these in the same or similar form sooner than that, you'll be hit with the wash-sale rule, which will disallow your loss.
You get the most benefit from tax-loss harvesting when you're in a higher tax bracket. You can only use this strategy in taxable accounts. Another money resolution? If your capital losses exceed your capital gains, you may be able to write off up to $3,000 of your losses against your ordinary income. The remaining losses can be applied to future gains.
Also, don't forget to top off all your personal or employer-sponsored tax-advantaged accounts such as IRAs, Roth IRAs, 401(k)s, flexible spending accounts (FSAs), health savings accounts (HSAs) and 529 college savings plans. For retirement plans, you can contribute until the tax-filing deadline in 2025. For health and college savings accounts, it's until Dec. 31, 2024.
"529 plans have gotten more favorable," said Boughan of Parkmount Financial. "For grandparents that might have grand kids, that's a terrific way to contribute in a meaningful way that can grow and be used for a variety of educational purposes."
And even if it's not used for education, it can still be rolled over for the child's retirement, he added. "So, there's a lot more versatility now with the more recent changes to the plan."
Don't Let Emotions Sway Your Decisions
While pursuing your financial goals is paramount, "investors should (also) focus on their behaviors, not just the outcomes of their portfolios," said Boughan.
"Many people get attached to achieving specific financial outcomes," he said. That might be "growing their net worth or hitting a certain rate of return. But these often involve factors beyond their direct control," he explained. "Instead, it's wise to set financial aspirations based on actions they can control."
For example, setting up an automatic investment plan. This can be done via your brokerage or 401(k) account through an automatic purchase plan. Most online brokerage platforms such as Schwab, Fidelity or Vanguard give access to robo-advisors which can select, monitor and even rebalance a portfolio based on your personal goals and risk tolerance.
A Solid And Safe Cash Reserve
Another important action is to create or evaluate your emergency fund.
"A solid cash reserve is essential to avoid liquidating investments during market downturns," said Peter Hughes. He's founder and principal at Evolve Investing, which caters to entrepreneurs.
The amount of the emergency reserve will depend on the amount of liquid assets that investors want to have on hand, said Hughes. "It's actually driven by their living expenses, or cost of living."
For clients with a highly predictable income, such as a salary and W-2 employees, Hughes recommends three months of living expenses in cash. If you have other predictable expenditures such as a home improvement, it needs to be added to that.
For entrepreneurs, whose income tends to be less predictable, he recommends closer to 12 months. However, "that does vary depending on the extent to which they're covering their expenses."
For a household that has a small business with wild income swings, for example, he'd recommend three to six months.
Stay Diversified, Stay Safe
As 2025 rolls in, so does a new administration. With it, many investors might be wondering what the consequences will be on taxes, interest rates and investment areas.
A very important money resolution for 2025 is to have a diversified portfolio.
"Many of my clients have reached out to me postelection and asked which sectors or companies would benefit under the new administration," said Hughes. "And I have seen a renewed interest in small cap stocks."
As such, he has increased the allocation to small caps in some of his clients' portfolios.
State Street Global Advisors' chief gold strategist George Milling-Stanley says that despite gold's exceptionally strong performance in 2024 (it's up more than 30% in 2024), it remains a valuable asset in one's portfolio.
And that is "because of its protective attributes," he said. "I'm not talking so much about the price of gold going up dramatically (in 2025). It might (go up), and I think there's some reason to think it might. But I think it's always a good idea to have some gold in a portfolio because of its protective attributes."
How To Invest By Spreading Out Investment Risk
"Gold doesn't have a strong correlation with anything else you'd find in a typical portfolio." As such, it allows investors to spread investment risk.
It is also a good hedge against sustained high inflation, a weaker dollar due to extended periods of interest-rate cuts, a potential equity market decline or geopolitical turbulence.
"International markets may present growth opportunities and reduce overexposure to the U.S.," said Alvin Carlos, financial planner and managing partner at District Capital Management. "Evaluate global index funds or ETFs for cost-effective international exposure."
Todd Ahlsten, chief investment officer at Parnassus Investments and lead manager of the Parnassus Core Equity (PRBLX) said that another smart money resolution is investing in high-quality, sustainable companies. It's an important consideration for 2025 and has always been a part of the firm's investment strategy.
"When you think about the environmental aspects of the business, employees, business ethics, governance – it's all part of the package of a high-quality company." That's also true for companies that have competitive sustainable advantages and increased relevancy in the global economy.
He believes that in 2025, "sustainability will be more important than ever." And that's despite a lower interest from the U.S. government. "It's going to be more on the back of companies to deliver a lot of innovations, which is what we've always really believed in."
Important drivers will be things like precision agriculture, artificial intelligence and data centers that require a lot of efficient power. Also, he expects continued growth in climate decarbonization, hydrogen and industrial gasses, as well as sustainable workforces.
