5 Ways to Be a Savvy Investor in 2025

Key Takeaways

1. The first tip for the year ahead is to make sure that you’re not underweighting unloved market segments.
2. Even though the rate of inflation has been coming down, you should not become complacent in your portfolio about inflation.
3. Take a closer look at your cash holdings to make sure that you aren’t holding too much in investment accounts that are really cheaping out in terms of their yields, and consider your liquidity needs.
4. When thinking about bond portfolios today, hold short-term high-quality bonds in line with your expected spending horizon.
5. When considering actual savings amounts, look for additional tax-sheltered savings opportunities.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. 2024 has been a good year for investors, but it’s anyone’s guess what 2025 might bring.

Joining me to share five tips for being a savvy investor next year despite the uncertainty is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Great to see you today, Christine.

Christine Benz: Hi, Susan. Great to see you, and thank you for the sales pitch.

Check Your Allocation for Underweighted Unloved Market Segments

Dziubinski: Christine, let’s find out how to be more savvy in 2025 with our investments. Your first tip for the year ahead is to make sure that you’re not underweighting or not paying attention to those unloved market segments. Talk about that.

Benz: Yeah, so the big category here, Susan, would be non-US. And of course, I’ve been banging this drum for a few years now, and yet we have continued to see non-US stocks underperform US. But there is a valuation advantage to non-US. There is also a diversification advantage in that you are getting exposure to sectors that today are kind of underrepresented in the US market, which tilts heavily toward technology and healthcare. There’s also a dividend advantage for people who care about that, and I know a lot of our viewers do. You’re getting higher dividend yields overseas as well. So, for investors who haven’t rebalanced their portfolio recently, I would take a look there. And then for the cohort of people who might be watching who are getting close to or maybe even in retirement, looking at high-quality fixed income, which haven’t necessarily made a great case for themselves over the past years, but just considering topping up those areas. Certainly they are no return match for what we’ve seen from stocks, but the idea is that if you’re getting close to or in retirement, you do want to make sure that you have that ballast in your portfolio, so high-quality fixed income would be a category to take a look at.

How to Defend Your Portfolio Against Inflation

Dziubinski: Even though the rate of inflation has been coming down, you’re still urging investors to not become complacent in their portfolios about inflation. So, why not? And what should they be doing to sort of defend the portfolio against inflation?

Benz: We have been seeing some indications that the bond market is a little bit concerned about inflation. Here in mid-November, we just had a slightly higher-than-expected inflation reading. That might be noise. But I think you always want to make sure that your portfolio, at a minimum, is keeping up with inflation in terms of its return potential, which is the reason why you wouldn’t want to be shoving too much into cash investments today. You need something that’s going to be able to grow a little bit over the inflation rate.

So, how you address this really depends on your life stage. If you are a young person, here I would say “young person” would be like anyone under age 50, you want to just have ample stock exposure in that portfolio because stocks, when we look at their long-run returns, do a good job of at least beating inflation by a decent margin. So, just maintain ample stock exposure. Your employer should be able to give you cost-of-living adjustments if we see inflation flare up again. That’s the main way you stay whole with respect to inflation. If you’re getting close to or in retirement, I think you want to think about carving out some explicit inflation protection in your portfolio. And there I would look mainly to Treasury Inflation-Protected Securities or I bonds, both of which work like bonds, but they offer you an inflation adjustment to help keep your purchasing power, to help it keep up with inflation. So, those are the main tools in the toolkit.

You might also consider some sort of ancillary inflation-protective investments. There I would think of commodities, perhaps real estate securities, but stocks and inflation-protected bonds are the main things to think about.

Take a Closer Look at Your Cash Holdings

Dziubinski: Another strategy that you’d like investors to pursue is to take a closer look at their cash holdings. What should they be looking for?

Benz: Right. We’ve seen yields, unfortunately, drop a little bit as the Fed has reduced rates, and so cash investments have followed along. What we see when we look at what firms are offering, firms that offer managed products or offer certificates of deposits, we see that there’s a pretty big gulf, that some firms are just pocketing investor’s money in a way. They’re offering very shrimpy yields. And this is particularly the case with these brokerage sweep accounts, where you can see yields of like 1% today. Shop it around, make sure that you aren’t holding too much in those investment accounts that are really cheaping out in terms of their yields. And also consider your liquidity needs. So if you’re someone who is parking money in a cash account because you need to pay next month’s tax bill or next year’s tuition payment, or whatever the case might be, you don’t want to lock the money up in a five-year CD, right? So consider your use case for the cash. And then, finally—we were just talking about inflation—don’t overindulge in cash. Cash has been pretty easy to pick relative to bonds for the past couple of years. But if we do see inflation flare up, you would just want to be careful about overinvesting in cash because you may be in negative territory once the inflation effects are factored in.

Don’t Get Too Tactical With Bonds

Dziubinski: Now for bonds, you say the best strategy, or the savvy strategy, is to not get too tactical. So what do you mean by that? And how should investors then be thinking about their bond portfolios today?

Benz: Yeah, we have a great recent example, I think, of many investors got caught leaning the wrong way with fixed income in 2024, where I think the expectation coming into the year was that we would see a lot of rate cuts, which would be very, very beneficial to those long-term bonds. Well, it didn’t materialize. And some investors got caught leaning the wrong way. So my bias is just to not get too cute with your fixed-income portfolio. Hold short-term high-quality bonds in line with your expected spending horizon. So if you have a spending horizon under, say, five years, keep it short-term. If you have a longer time horizon of, say, five to 10 years, keep it intermediate term, keep it high-quality, and then call it a day and use plain-vanilla, very low-cost, fixed-income funds to populate your fixed-income portfolio.

Key Tax-Sheltered Savings Opportunities to Consider

Dziubinski: And then your final strategy relates to actual savings amounts. So you urge investors to look for additional tax-sheltered savings opportunities. What are some of the key categories that they should be looking for?

Benz: One 2025-specific thing I want to call out, Susan, is the fact that for people who are between age 60 and 63 in 2025, they’ll have the opportunity to make additional catch-up contributions to their company retirement plan. So it equates to $11,250 is the additional catch-up contribution available just to people in that specific age band. If you’re older than that and contributing to a 401(k), unfortunately, you’re out of luck. But this is part of Secure 2.0 that we’re seeing phase in very gradually. So if you are in the enviable position of being able to fully fund your 401(k) and then some, look for those additional savings opportunities.

Then a couple of categories I would call out additionally would be the HSA, the health savings account. If you’re covered by a qualifying high-deductible healthcare plan, consider funding that HSA, consider using it as a long-term investment vehicle if you can afford to do that. And then some people, especially people with very large employers, have what are called aftertax 401(k)s and that would be an option to allow you to put a lot more into the 401(k) than those baseline funding levels. So check that out, especially if you are with a large plan that offers what are called in-plan conversions. So you’re making the aftertax contribution, the funds are getting converted to Roth inside the plan. It can be a really terrific option for super-savers.

Dziubinski: It was great advice for being savvy in 2025. We appreciate your time, Christine.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch How to Rebalance Your Portfolio Before 2025 for more from Christine Benz.