As we enter 2025, navigating the financial markets calls for careful planning. Over the last two years, we have seen exceptional stock market returns, exceeding 20% annually. While this has sparked a sense of optimism, it is important to remember that history paints a different picture. Instead of chasing recent performance, consider focusing on the following strategies as you plan for the year ahead:
Have Realistic Expectations
The stellar returns of the past two years are not the norm. Historically, annual stock market returns tend to average between 9% and 10%, half of what we’ve recently seen. Although continued gains in capital markets are certainly possible, recalibrating your expectations to align with the more sustainable returns we see throughout history can help you stay grounded and avoid disappointment.
As we move into 2025, consider anchoring your planning around historical averages, or slightly below to be conservative. This strategy can help your financial goals remain achievable and more aligned with reality.
Review Allocation Targets
While these recent high returns may have helped your portfolio grow, it likely means that your investment mix – stocks, bonds, and other assets – has drifted. Rebalancing is the process of adjusting your portfolio to restore the target allocation. Making these periodic adjustments can help your allocations to stocks, bonds, and alternative investments stay more closely aligned with your investment goals and risk level. For example:
- Qualified Accounts (401(k), IRA, Roth IRA): Rebalancing here incurs no tax consequences, making it a straightforward decision.
- Non-Qualified Accounts: While capital gains taxes may apply, rebalancing is often still beneficial. The long-term benefits of maintaining a disciplined strategy tend to outweigh the short-term tax costs.
Reducing risk after periods of strong market performance can help protect your portfolio against potential downturns, preserving gains while positioning for steady growth.
Execute Charitable Gifting Early
Charitable giving can be a strategic financial move, particularly when executed early in the year. If you hold appreciated stock in non-qualified accounts, donating appreciated shares of stock directly to charities can help you avoid capital gains taxes while providing the full market value as a charitable deduction.
For retirees over the age of 70.5, Qualified Charitable Distributions (QCDs) offer another tax-efficient option. Donating directly from your IRA to a qualified charity can help you meet your required minimum distributions (RMDs) while also reducing taxable income.
Conclusion
As you create your 2025 financial game plan, try to focus on setting realistic expectations, maintaining disciplined allocations, and leveraging tax-efficient giving strategies. These steps can help provide a strong foundation as you navigate financial markets in the year ahead.
Remember, you do not have to tackle your finances alone this year. Our team of CERTIFIED FINANCIAL PLANNER® professionals is here to help. With personalized guidance tailored to your unique needs, we’re dedicated to helping you navigate your financial journey with confidence. Ready to take the first step? Schedule an introductory phone call with us at 205-879-5001.
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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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