In many ways, the first half of 2025 has felt a bit like the movie Groundhog Day.
You wake up one day to see news that new tariffs are going into effect, the market dips, a deal is made, and the market rebounds. Rinse and repeat as the valleys of anxiety continue.
As of March 1, the world was still optimistic about the start to President Trump’s second term; however, that changed in early April once new tariffs set in, toppling the market. Fast forward to the end of May, and the S&P had its best May performance since 1990, +9.5%.
At M3 Family Office, we’ve long encouraged our clients to be long-term investors over short-term traders. That means investing in the long-term growth of the economy rather than seeking short-term arbitrage opportunities. We believe that despite the turbulence to start the year, it is possible that the core policies of the administration (budget reconciliation, tax cuts, deregulation, and increased investment in the United States) could produce 3-4% economic growth. Rather than try to outperform the market by picking winners and losers, M3 advocates investing in the long run to earn your fair share of market returns.
If there’s one thing we can learn from the first five months of the year, it’s that you’re probably better off not checking your portfolio, turning off the news, and staying the course.
The Math Behind Staying the Course
It’s simple, the math shows that it may be wiser to stay the course than try to time the market.
If we look at the S&P 500 for the year, even with the precipitous drop in April, it wouldn’t have been so bad if you had diversified and held the entire time.
As of April 8, the S&P 500 was down 15% on the year; since April 8, it has been a different story: the index is up YTD and bounced back with an 18% gain since its low point. What’s more, even after the drop and recovery, the S&P is up over 11% going back to last year.
As we can see here, selling out of panic may force you to sell high and pay capital gains as a result, while also buying at a premium to get back into the market. This is not limited to a one-time dip. Vanguard published a series of helpful illustrations to showcase annualized returns in the US stock market from 1996 to 2024:
But what’s even more telling is the graphic below showing what would happen to a 60-40 $100,000 portfolio if you missed the best or worst days in the market.
By trying to time the market, you risk missing some of the best days, which can result in earnings lost compared to if you had invested for the whole time. Of course, if providence is on your side and you miss the worst days, then you stand to gain even more – but who is to say the day you decide to opt out of the market is going to be the “worst” day or turns out to be among the best?
No one can predict the future, and trying to time the market opens you up to missing out on potential gains to be won by staying put.
The Strategy Behind Staying the Course
We believe that planning drives investment management.
That’s why we employ liability-driven investment allocation, a concept from pension plan investing. Using this strategy, you plan your allocation and duration for the year based of your cash flow needs. In other words, take on little risk in the short term when funds may be needed at a moment’s notice, and increase your risk in the long term to bet on future economic growth.
At M3 Family Office, we take a “three bucket” approach to financial planning:
- 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.
The volatility of 2025 is a textbook example of the potential for personalized indexing.
For example, if you owned VOO, then your year-to-date return would be 1.94% – but at one point this year, that return was -18%. Holding and riding out the short-term volatility results in the benefit of being a long-term investor, but you also did not reap any tax benefits from that short-term dip.
Personalized indexing could allow you to own the index and earn that return, but harvest losses along the way and create an opportunity for tax alpha. You boost your return by getting the performance of the index you choose, as well as the potential for real tax savings.
At M3 Family Office, personalized Indexing uses a new technology Vanguard made available to advisors to replicate indexes through a basket of individual shares in a separately managed account (SMA).
This goes far beyond simply purchasing shares to replicate an index yourself. Vanguard’s personalized indexing technology attempts to automatically replicate indexes of your choice and optimize the tax benefits daily with minimal tracking error.
The purpose is not to time or outperform the market but to track an index’s performance and take advantage of tax loss harvesting from securities within that index throughout the year to offset income.
Invest for the Long Haul, With a Cash Strategy That Meets Your Needs
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.