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Investment Tips for 2025

Despite highly uncertain macroeconomic and geopolitical environment, financial markets rewarded investors in 2024 with stunning returns on their investments. Now, focus is shifting to 2025 with fresh hopes and interesting predictions. Macro factors remain with many unknowns and investors are planning to position their portfolios to deal with those unknowns while not missing on potential returns. Consequently, it is good time to consider some important tips that may help navigate through another challenging year ahead.

Macro forecasting is important, but it is hard. Perhaps one of the top tips is to realise that predicting future is very difficult, specifically when it comes to macro forecasting.

At Simply Ethical, we value the importance of understanding the macro-economic environment, which certainly helps in investment decision making, however, forecasting macro and getting it right all the time with precision is not always possible. Our investment process combines both top-down and bottom-up approaches to formulate our investment strategies and construct portfolios based on investor objectives and risk profile. Top-down investing means making investment decisions based on the outlook for the economy and what that is likely to mean for individual assets. We look at various macroeconomic indicators including economic growth, inflation, interest rates, currency movements, political developments and global trends to help us identify key investment themes and opportunities in various sectors or industries. This helps determine our asset allocation parameters for various investment strategies.

Focus on right asset allocation

If anything, we have learned from the history of financial markets is to get asset allocation right given very uncertain and unpredictable nature of the markets. As the following chart highlights, equities may provide you the best returns over the long-term, however, they are more volatile compared to other asset classes. Short-term fluctuations can result to significant drop in asset values, which can take years to recover. Therefore, right asset allocation is key to avoiding significant drawdown in your investment portfolio value if things go wrong. By picking the right collection of assets and allocating to them prudently, you may be able to limit your losses and decrease the volatilities of investment returns without losing too much on potential profits.

Annualised Returns from a mix of UK Equities and Fixed Income Assets (1901-2023)

Source: Vanguard Investor

Diversify your investments across assets and regions

Diversification is important and should not be confused with asset allocation. While asset allocation refers to the percentage of stocks, bonds/sukuks, alternatives, and cash in your portfolio, diversification involves spreading your assets across different asset classes as well as geographical regions. Diversification is beneficial for your investment journey. Remember the famous phrase we all are aware of, “do not put all eggs in one basket”. The following chart provides a good view of key developed equity markets’ valuation (US, UK, Europe). Although Europe and UK equities look attractive purely based on relatively cheap valuations compared to US equities, however, they may be cheap for good reasons. Similarly, US markets’ high valuation is largely supported by strong economy, corporate earnings, and technological advancements. Diversification across different equity markets will help you limit the downside risk that comes with portfolio concentration in any single market while helping to achieve good returns over time.

Source: Financial Times

Although US equities look expensive compared to other key equity markets, but they deserve a considerable portion of your portfolio given their outstanding historical performance supported by strong corporate earnings over the last 15 years after the Global Financial Crisis (GFC) of 2008 (see the image below). Historical investment returns should not be the guide to future returns; however, they still provide you a perspective to think about your future investment performance.

Source: Blackrock

Be careful with fixed income assets

Fixed income asset class (Sukuks) is an interesting investment which provides decent regular income along with potential returns from capital appreciation in a falling interest rate environment. However, a complex group of macroeconomic factors impact yield curves and heightened uncertainty around macros can push or keep yields higher for a prolonged period. That can potentially impact future returns (values of fixed income assets drop when yields rise and vice versa). Yields had been highly volatile over the last couple of decades as highlighted by the following graph.

Source: Blackrock

Commodities deserve some allocation in your investment portfolio

Commodities can be a good addition to your investment portfolios as they help to diversify the investment portfolios as well as provide decent returns. For example, commodities (i.e., gold, silver, platinum, copper) generally do well during economic expansions because of their use in the industry. Additionally, commodities also provide a natural hedge in a diversified portfolio against fluctuations in the US dollar. Generally, commodities do well against depreciating US dollar. Moreover, many commodities are expected to experience a deficit in coming years, but demand is expected to rise at the backdrop of economic expansion. This supply-demand imbalance can push commodity prices higher in coming years.

Take a long-term view on investments

It is important to realise that investing is for long term because the nature of financial markets is very uncertain and unpredictable. Regardless of the economic and market outlook, having a diversified portfolio can help to smooth out returns over time. Asset prices can be influenced by several factors other than their fundamentals. However, in the long term, their values tend to move along with their fundamentals. Knowing that economies work in cycles, and different stages of economic cycles take years to shape. Therefore, to successfully navigate through those economic cycles, a long-term perspective in investing is the right thing to have.

Predicting the next market moves is hard – avoid market timing as much as possible

Market volatility is part of the game, and there is a large set of variables that impact stock prices. Predicting the market is very hard if not impossible. Market has the ability and capacity to surprise you, and it will continue to surprise you, irrespective of how clever you are. Have a look at the 2024 year-end predictions vs current market levels for S&P 500 index in the following image. The market has largely outperformed the predictions. It would be more appropriate to focus on your long-term goals and avoid timing the market. Remember, you are in this game for the long-term, and markets generally go up over time amid growth in economies and corporate profits, innovations, and many other factors.

2024 Year-end predictions vs current level (S&P 500)

Source: Vanguard Investor

Time in the market is better than timing the market

This is important as high inflation erodes the value of uninvested money in the form of reduction in your purchasing power over time. One of the important objectives of investing is to beat inflation over time so that you protect the real value of your money and to further grow your wealth. No doubt, investing comes with risks and your investment values can fall as well as rise, however, being out of the market is not a good remedy. Plan well how to navigate short-term market volatilities and put your money to work in the markets. Remember the patience is a virtue. If you are a true believer that economies will grow over time, which they tend to do as populations nurture and productivity improves, then you will expect corporate profits to increase and with that the investment values too.

Make informed investing decisions and stay away from the herd mentality

Next market moves could be highly uncertain and very difficult to predict, therefore, staying the course and sticking to your plan is the right thing to do. Take a balanced approach based on your goals and attitude to risk and occasionally rebalance it to maintain the proportion of different asset classes that you are comfortable with. Remember, investing in equities is not for everyone as it is a highly risky asset class. It all depends on your risk appetite. If you cannot withstand the level of volatility stocks can have, you should mix this asset class with other less risky investments to diversify the investment risks. It is always better to consult a financial adviser before making any investment decisions.

Avoid the FOMO of Crypto Market

Performance of crypto assets like Bitcoin, Ethereum, Solana, etc., is quite intriguing but keep in mind that these digital assets are volatile in nature and are not regulated. It is best advised to avoid the fear of missing out (FOMO) and only invest in these assets what you can afford to lose. Please note, check for Sharia compliance prior to investment.

Put some money aside for an emergency fund

The nature of markets is volatile, and macroeconomic environment is highly uncertain driven by high inflation and interest rates, geopolitical situation, and growing threats for trade restrictions and tariffs. Therefore, it is best advised to adapt with the markets’ developments. Having an emergency fund is vital to avoid any unforeseen financial difficulties e.g. loss of job or bad health etc. It is prudent to hold an equivalent of 3-6 months expenditure in an accessible bank account. Remember the famous quote – “markets can remain irrational longer than you can remain solvent”.

Utilise your ISA allowances

Do not forget to utilise your ISA allowance to grow your capital tax free. The ISA allowance for 2024/25 is set at £20,000 and for Junior ISAs it is £9,000. One can utilise this allowance before 5th April 2025 and the same amount after 5th April 2024, assuming government does not change the limit for 2025/26.

If you need further tips, book a free consultation with our Financial Advisers

To learn more about how we can help you and about our investment approach, book a free initial consultation with one of our Financial Advisers.

Disclaimer

This article is for information only. Please do not act based on anything you might read in this article. Past performance is not a reliable indicator of current or future returns. This article contains general information only and does not consider individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it would be unlawful to market such an offer or solicitation.

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