Hot off the heels of back-to-back 20%+ yearly gains between 2023 and 2024, the S&P 500 has kicked off 2025 with the worst quarter since 2022.
To say that the S&P 500 is off to a rocky start this year is an understatement. Tariff uncertainty, persistent inflation, and a lagging tech industry have all brought the index down to start 2025.
We’d understand if the start of 2025 has you jittery. It’s even understandable if it gives you pause, or causes you to decide to hold cash rather than invest.
Understandable and wise are not always the same, though. In this article, we’ll examine why a long-term outlook based on your cash flow needs and risk tolerance matters now more than ever.
Avoid the Roller Coaster, Invest for the Long Haul
We’ve written about the case for passive investing over active management.
Try as they may, active managers often neglect to mention that over the long term, active management rarely outperforms a passive strategy. A Morningstar report of active versus passive fund performance shows that it is essentially a coin flip whether an active manager survived and beat the average passive fund.
The reason is simple: the market is efficient and there are few arbitrage opportunities for active investors who wish to pick individual stocks.
This is especially important to remember in periods of change. With the Trump Administration in full swing, new fiscal policies are beginning to take effect and impact the economy (along with consumer expectations and perceptions). These changes include but are not limited to:
- Immigration policies that impact expectations around labor supply.
- Tariffs (including their reversals) that create uncertainty around trade and supply chains
- A shift in energy policy toward increased domestic oil production
- New leadership and the potential downstream effects on mainstays like healthcare, food and beverage, and pharmaceuticals
While it’s tempting to try to “get ahead” of these policy shifts, that puts the burden on you to outsmart an efficient market and perfectly predict the future – both are statistical impossibilities in the long run. Not to mention the fact that the next administration could very well reverse these policies, making it far better to simply tune out the noise.
Beyond tax efficiency, lower fees, and simplicity, a long-term outlook keeps your mind off the roller coaster ride that can happen with a short-term view of the stock market.
As Nobel Laureate Merton Miller said, there are three simple truths when it comes to investing:
- Markets work
- Costs matter
- Diversification is your buddy
Know Your Risk Tolerance and Cash Flow Needs
Beyond a long-term passive approach to investing, there’s one more step you can take to avoid the Valleys of Anxiety when Wall Street flashes red: know your risk tolerance and cash flow needs.
We believe that planning should drive your asset allocation and investment decisions. There are two key pieces to this:
- Knowing your cash flow needs
- Understanding (and sticking to) your risk tolerance
We like to break cash flow into three primary buckets depending on the funds you need and the timeframe you will need them:
- Money you need now: This is your immediate savings that you need to access at any given moment. It could be a savings fund or cash set aside for anticipated bills or capital calls. We recommend keeping this in the highest-yield money market account you can find. With interest rates staying put, you can still get 4% or more on a money market account.
- Money you will need relatively soon: These are funds you may need in the near future, but not at a moment’s notice. For instance, a down payment for a home or a tuition payment. We recommend investing these in lower-risk investments, like a Treasury ladder to lock in rates and avoid state income tax on gains.
- Money you won’t need for a while: This is money you invest for the long haul based on your preferences and risk tolerance. We recommend a broad, index-based approach to bet on the long-term growth of the economy; however, through personalized indexing, you can tailor your portfolio based on your interests or harvest tax losses.
Taking a broad market approach, you can still refine your strategy based on your appetite for risk:
- Lower Risk: If you’re risk-averse, you might prefer a portfolio with a higher allocation to bonds, money market funds, or other fixed-income securities. These typically offer lower but more stable returns.
- Moderate Risk: A balanced approach might include a mix of stocks (e.g., 50-60%) and bonds (40-50%).
- Higher Risk: If you can handle more volatility, you might lean towards a higher equity allocation, possibly 70-100% in stocks, focusing on growth or index funds.
The last thing you want is to be put in a position where you have to sell positions at the wrong time. By investing according to your cash flow needs and following a strategy that matches your risk tolerance, you can avoid the roller coaster ride of day-to-day price changes and hold a longer-term view.
Have You Checked Your Risk Profile?
If you’re catching nerves from the news cycles, when was the last time you assessed your cash flow needs and risk profile?
If you can’t remember, then now may be the right time to do it. Should we continue to navigate through bumpier waters in 2025, it’s more important than ever to set an allocation based on your financial plan – and stick to it.
We invite you to take our free risk questionnaire to determine your risk tolerance. If you would like to discuss the results or any changes to your strategy, please reach out to us from our website.
This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
All investments include a risk of loss that clients should be prepared to bear. The principal risks of M3 Family Office LLC strategies are disclosed in the publicly available Form ADV Part 2A.
M3 Family Office LLC (“M3 Family Office”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where M3 Family Office and its representatives are properly licensed or exempt from licensure.