Stock markets are off to a flying start for 2025. The S&P ASX 200 is up nearly 5%, with gold, banks and technology companies continuing their bull runs from 2024. The consensus view is that banks and tech are expensive, but the market doesn't seem to agree, or at least it doesn't care.

Moments like this can be challenging for investors; fundamentals tell you to look the other way, but ignoring the temptation to follow the momentum is hard.

In this episode of the Rules of Investing, Laretive shares some tips for keeping a cool head when markets are on fire, identifies some opportunities from the lower Aussie dollar and discusses three stocks he thinks can deliver strong results in the upcoming reporting season.

Paul Tudor Jones article Seneca's M&A list

The past few years have been kind to investors. A glance over 2024 asset class returns suggests that most Australian investors have been sitting on healthy gains for the past 12 months, with the much-loved banks leading the charge. Global equity exposure will have sweetened returns, with the S&P 500 clocking up consecutive years of +20%. Even conservative investors have been rewarded with returns on cash, which is the best we've seen in decades.

It's in our nature to resist making changes to a winning formula. However, with market leadership being highly concentrated and, for the most part, coming from high-growth stocks, there's a decent chance that your portfolio has developed a few biases and overweight positions.

Why does this matter? Markets have repeatedly reminded us that good times don't last. Reviewing your portfolio and making tweaks or rebalances is prudent. This ensures you harvest some of those gains and position your portfolio for all market conditions.

Livewire's James Marlay spoke with Charlie Viola from Viola Private Wealth and Ben Clark from TMS Private Wealth to explore the factors they think matter for 2025, discuss how they are allocating capital for the year ahead, and to get some professional tips on rebalancing your portfolio.

Putting theory into practice, he also revealed his SMSF portfolio and asked our guests to share the changes they would make. To see the charts and tables referenced in the podcast are on this link: https://www.livewiremarkets.com/wires/how-to-invest-1-million-in-2025 Charts

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Aus vs US earnings Asset Allocation Tables

If you’re feeling upbeat about markets as we head into 2025, you’re not alone. 41% of investors that participated in Livewire’s Outlook Series Survey said they are feeling optimistic about markets right now, well ahead of the following most popular response with 30% of survey participants saying they are feeling anxious.

The responses are not surprising, given the decisive run in equity markets in recent years. The S&P 500 is on the cusp of racking up consecutive years of 20%+ returns. A feat only achieved four times since 1926.

The other instances occurred in 1927-1928 before the great depression, in 1942-1943 during World War II, from 1995-1999 there were unprecedented gains with five 20%+ years and more recently in 2017-2018.

Investors are likely feeling optimistic given the strong returns on offer, whilst it is natural that anxiety is growing and a recognition that the good times won’t last forever.

Unfortunately, history provides little solace for those investors looking to the past in the hope that it might give some clues as to what 2025 might hold. The returns in the years following the four historical precedents are ambiguous, with a 50/50 split between negative and positive returns. However, the drawdown years were smaller than when markets continued to rally.

So, how does this information help us, and what should investors think about as we head into 2025?

To answer this question, we drew on the expertise of top-rated financial adviser Paul Burgon, Chief Investment Officer and Managing Partner at Lipman Burgon and Partners. Paul has decades of experience allocating capital on behalf of his clients and was ranked #6 in 2024 on Barron’s list of top financial advisers.

Even with his experience, Paul acknowledges that predicting the future is fraught with danger and a recipe for disappointment. However, over his career, he has developed a set of ten principles that he believes can underwrite investment success.

These principles draw on the renowned endowment model of investing developed by David Swenson and are now widely adopted by many leading investment institutions, including Australia’s Future Fund.

Yale’s endowment fund returns under Swenson are compelling, having delivered annual returns of 14% over 35 years.

Summarising the underlying objective of Burgon’s philosophy is relatively simple. He is seeking to remove or dampen the influence of emotions on investment decisions. In 2024, access to extensive research, institutional-grade investment models and improved access to private markets make it possible to achieve more consistent returns, reducing the prospect of poor decision-making at times of peak emotion.

While few of us will be seeking to replicate the allocation of global endowment funds, I’m sure most of us would like to bank the healthy returns of recent years and dampen the impact of any impending market dislocations.

“If you can have more reliability of outcomes in your equity allocation and more consistency of returns that is a much better way to allocate capital than trying to chase the next high-performing manager.”

In the final episode of The Rules of Investing, we hope to leave you with valuable asset allocation and portfolio construction insights from one of Australia’s top financial advisers. And while we’d all love to see another 20% + year from the S&P 500, it makes sense to ensure your portfolio can withstand the chance that 2025 could be a down year. Better to be safe than sorry!