Investment Questions to Consider in 2025

Allegheny Financial Group’s Boyd Group recently interviewed our Director of Research, Joe Clark, CFA, to discuss trending topics in today’s investment world as we head into 2025.

What is Direct Index Investing? A High-Level Overview

Direct indexing is essentially creating an index fund tailored to a client’s specific needs. Rather than investing in an S&P 500 Index fund or total market index fund, you work with a manager to create a custom index fund that is designed to meet that client’s goals. You can combine indexes and add additional screens to adjust exposure to specific areas of the market. One of the main advantages is the ability to fund the direct index account with highly appreciated securities to better manage taxes, creating highly personalized investing strategies.   

The ability to fund the account with highly appreciated securities is what makes direct indexing so attractive. Let’s say that a client has owned Apple stock for a long time and is sitting on a very large gain. You could move that stock to a direct index manager and inform them of how much or little the client is willing to pay in taxes each year.  The direct index manager will work to diversify this one position into many positions while also seeking to take tax losses. For example, the account could buy Coca-Cola and assume that after a few months of owning it, the stock’s price would fall. The manager could then sell Coke and buy Pepsi, which behaves similarly to Coke, but that loss is on the books, which can then be used to sell some of Apple's position, using the losses from Coke to offset the taxable gain on Apple.

Pros and Cons of Direct Indexing Explained

Direct indexing can be a very effective tool for client portfolios, but it’s essential to understand the benefits and drawbacks.

Pros:

• Flexibility to tailor each account to individual client goals.
• Ability to customize tax strategies and index allocations.
• Lower costs compared to traditional investment options.

Cons:

• Requires a high account minimum to fully benefit from customization.
• Not accessible to all investors due to account size requirements.

Common Investment Myths to Leave Behind in 2025

In the internet age, it’s easy to become overloaded with ‘advice’ and ‘best practices’ that may not serve you well. Here are two myths we frequently encounter, along with what you should know about them.

Investment Myth 1: Focusing Too Much on the Short-Term

Many investors make decisions driven by short-term market movements, often influenced by FOMO (fear of missing out). This leads to buying high and selling low—an approach that typically underperforms market benchmarks. For example:

• Why it happens: Investors follow the crowd or react to media hype, hoping to match others' gains.
• The result: Buying late in a trend often coincides with a market downturn, reducing returns.

Investment Myth 2: Avoiding Volatility at All Costs

Volatility can make investors anxious, leading to premature selling at the worst times. However, successful investing often requires riding out market fluctuations to benefit from long-term rebounds.

• Example: Avoid purchasing a stock with a roller coaster-like track record.
• Key takeaway: If you cannot tolerate temporary losses, consider more stable investments to avoid emotional decision-making.

The Long-Term Approach:

The next time FOMO hits, focus on the long term. Maintaining a long-term, diversified allocation ensures you have some exposure to areas that are performing well while managing risk during tough times. Compound returns are the greatest benefit of investing and can only be achieved by investing for the long term. Compare your portfolio to its historical value and assess how well it meets your goals, rather than focusing on the best investments others are making. Remember, people tend to discuss only their best investments. 

CDs vs. Money Markets: Are They Worth It in 2025?

Assets in money markets and CDs should be those that will be used in the next few months or an emergency fund that cannot lose value. The problem with money markets and CDs going forward is that the rates they pay are directly tied to the Federal Reserve, which is in the process of lowering rates. Money markets are paying about 0.75% less today than they did a year ago. Chances are that money markets will pay 3% before they pay 5% again. Money market yields of 3% will make other investments look much more attractive.

High-yield savings accounts and CDs can be attractive depending on your timeframe, especially if you plan to wait to spend the cash. However, you should maintain a diversified allocation designed to meet your goals for retirement accounts and assets that will not be used in the near term. Cash should represent a minimal allocation because long-term wealth is generated in the stock market, not by holding cash.

Post-Election Portfolio Adjustments: What You Need to Know for 2025

We just made it through one of the most divisive elections in history, and people have very strong opinions, no matter what side you sit on. Before making any changes to your investment portfolio, ask yourself: are you going to change your day-to-day life because of the President? This includes going out to eat, going on vacations, changing jobs, moving to a new house, etc. If you are not going to change these day-to-day activities because of who is in the White House and Congress, why would you change your investment portfolio?

Presidents tend to receive too much credit when markets perform well and too much blame when they decline. In the short term, politics could impact stock market returns; however, over the long term, these returns are driven by the performance of the underlying companies, not by events in Washington, D.C.

The only advice is: if parts of your allocation have performed really well this year, take profits and reinvest in other areas of the portfolio that have not performed quite as well. Other than that, keep the same approach; after all, we will have a mid-term election in two years and another presidential election in less than four years.

The Future of Crypto Diversification: Navigating Regulatory Shifts in 2025

Gold has been around for a long time and still is not one of the main pillars of many investment portfolios, so I will not even guess how crypto might impact investment portfolios. Right now, we know it is a very volatile asset. Many people have made a lot of money from crypto, but many have also lost money because they panicked during the most volatile periods.

Now that Bitcoin and other cryptocurrencies can be accessed via ETFs, it is much easier for investors to gain exposure. For those interested, I suggest looking into ETFs and starting small, knowing this will be a volatile part of your portfolio.

Joe Clark, CFA | Allegheny Financial Group | December 2024

The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.