Investing in stocks and bonds will become more difficult under the Trump administration.

Financial markets have been volatile since the November election, and for good reason. There's a lot to be nervous about, as the incoming presidential administration promises radical policy changes on a wide range of economic issues.

New proposals come in at a dizzying pace. The president-elect says he wants to deport millions of immigrants. Imposing tariffs on all countries, especially China. Tax reduction. Expand the use of cryptocurrencies. Eliminate wind power generation. and increase fossil fuel production.

It is impossible to know which policies are fanciful, which ones will be implemented, and what impact they will have on the economy and markets. No wonder the market is in turmoil.

Still, if most investors need solace, a look at their portfolio is enough. If you've held stocks since the end of 2022, when market conditions improved dramatically, there's a good chance your portfolio has performed well. All I really needed was a slice of the US stock market in a cheap, diversified index fund. As the final annual numbers on portfolio performance for retail investors reveal, while bonds have delivered mediocre returns, U.S. stocks have fared well, with S&P 500 dividends on each of the past two calendar years. The annual return including this is approximately 25%. year.

While these gaudy returns offer reassurance, they are not a prediction, especially after the disaster of 2022, when inflation soared, interest rates rose, and the value of stocks and bonds fell. No one knows where the stock, bond, and commodity markets will be when 2025 ends.

But history suggests a sobering lesson: stocks and sectors become obsolete. What worked the last two years may not work the next year. After a period of outsized returns, sooner or later a market decline will occur.

We don't know what the market will do in the short term. But if you want to reduce volatility in your investments over the next few years, I think it's important to look beyond U.S. stocks and the few big tech companies that have been driving domestic profits lately. It holds a wide range of international equities as well as diversified investments in bonds.

recent returns

After a brief rally from Election Day to Nov. 11, stocks stalled, with U.S. domestic equity funds averaging less than 1% gain in the last three months of the year, according to financial services firm Morningstar. . The average actively managed fund lagged the large-cap S&P 500 index, which rose 2.3% in the quarter.

Bond funds performed worse in the quarter. Taxable funds decreased by 2.5%. Municipal bond funds fell by almost a percentage point.

The cause is that yields are rising despite the Federal Reserve's short-term interest rate cuts. The bond market's assessment of the economy and the inflation risks posed by the incoming administration's policies is less optimistic than the Fed's. The market believes that prices are likely to rise sharply. Although there are differing opinions within the Fed, the central bank as a whole believes that inflation is on a downward trend. Rising bond yields also appear to be behind the slump in the stock market.

Looking to 2024 as a whole, the return on investment looks to improve. Domestic stock funds rose 17.3% for the year, but significantly underperformed the S&P 500 index. A study by BofA Global Research, a division of Bank of America, found that 64% of actively managed large-capital funds fail to outperform the market. Bank of America found that this underperformance has been occurring regularly for decades. Because of this poor performance, I rely primarily on broad index funds that simply try to match market returns.

Most bond funds have made modest gains this year. According to Morningstar, taxable bonds returned 4.5%, while municipal bonds returned 2.7%.

Most international equity funds were not keeping up with their US counterparts. It decreased by 6.7% in the quarter and increased by 5.5% for the year.

take a risk

To get the best returns, you had to be smart or lucky to bet on a particular company or sector and hit the mark. An alluring investment in artificial intelligence is a big winner in 2024. Nvidia, which makes chips for AI, rose 171%. Only two stocks trailed other S&P 500 stocks. One of them was Palantir Technologies, a military contractor that uses AI, with a profit of 340.5%. The other company is Vistra, a nuclear power plant operator whose demand is increasing due to strong demand for electricity from companies developing AI. 258% increase.

Technology funds rose 31.1% for the year, according to Morningstar. Semiconductor UltraSector ProFund rose 106%, primarily driven by Nvidia. Its stocks accounted for more than half of the fund's assets, and it also used derivatives to magnify its results. This strategy was great last year, but if NVIDIA stalls, it will be a huge loss.

Money concentrated in banks, which were able to borrow money at low interest rates thanks to the Fed and lend at much higher rates thanks to the bond market, also flourished last year, with an annual return of 27.6%.

Then there was MicroStrategy, whose primary business was buying and holding Bitcoin. MicroStrategy is up 359% in 2024, but this windfall will evaporate if Bitcoin becomes obsolete like it did in 2022.

Most people who invested for retirement took less risk and earned less money, but still earned high returns. Funds that allocated 50% to 70% of their money to stocks and the rest to bonds returned an average of 11.9% annually, according to Morningstar. Companies with 70-85% equity and the rest in bonds rose more than 13%. Although high-quality bonds have depressed returns for investors, they have historically been safer than stocks and are often a painkiller when stock markets decline.

remember the 90's

Tech stocks have historically boosted returns. These were the keys to superior market performance during the dot-com era of the 1990s. From 1995 to 1998, the S&P 500 index rose more than 20% each year, rising nearly 20% in 1999, largely due to the strength of tech stocks.

However, the market rose too high and a bubble formed, which burst in March 2000. The stock suffered catastrophic losses for three consecutive years that year. If you first invested in stocks at the end of 1999, your holdings would have been underwater until 2006. Returns over a full decade have been disappointing.

According to some metrics, the current stock price isn't as extravagant as it was then, but it's still high enough to be a cause for concern. As a permanent investor, I seek solid returns over a lifetime, but I'm keenly aware that years of gains can be wiped out in a market crash if you're not prepared for trouble.

That's why I'm hoping the US market doesn't rise too quickly right now. Stock market corrections (defined as declines of more than 10% and less than 20%) may even be a good thing, as long as the economy and corporate profits continue to grow. Classic valuation metrics such as the price-to-earnings ratio will become more attractive, potentially pushing the U.S. stock market higher.

But given that level and the extreme political uncertainty, it seems foolhardy to bet entirely on U.S. stocks, especially tech stocks, right now. Relatively speaking, bond prices are competitive, and bargains can be found in major international stock markets and overlooked parts of the U.S. stock market.

I'm not suggesting you choose between these different sectors or asset classes. It's just that your portfolio contains some of them all. If stocks rise again, rebalance your holdings to restore a mix of assets that can coexist.

Because you are hedging your bets, you are not getting the best returns. It's been a great performance, so I'm hoping for another solid rally in the stock market, but I'm also going to be well prepared for the next storm.