2025 is right around the corner, making it the perfect time to reflect on your financial journey in 2024 and where you want to be next year and beyond.
While part of that reflection can include hopes and dreams, it's also important to identify some mistakes to avoid next year so that you can stay on track to hit your financial planning goals.
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The pitfalls of sector rotations
One of the worst moves an investor can make is jumping out of a company or sector just because it is underperforming in the short term and putting that money into a hotter sector. There are countless examples of where this strategy fails and leads to missed opportunities. But perhaps the most potent is 2022, when several mega cap growth stocks got hammered due to valuation concerns, inflation, and slowing growth.
At the end of 2022, the combined market capitalization of Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia, and Meta Platforms was $6.9 trillion. Less than two years later, the combined market cap of those same seven companies is $17.6 trillion. Investors who panic-sold out of growth stocks just because they were out of favor would have missed a historic rally.
AAPL Market Cap data by YCharts
Other noteworthy examples include selling out of oil and gas stocks during the downturn of 2020. In the last four years, the energy sector is up 129%. Or selling out of the financial sector in 2023 in the wake of the banking crisis that saw some small to mid-size banks fail. So far this year, financials are the best-performing sector -- outperforming tech and many growth-focused ETFs.
The key takeaway is that the market moves in cycles. Sectors and themes can go in and out of favor for various reasonable or silly reasons. But smooth out the trend over time, and quality companies with earnings growth tend to win out in the long term.
Managing momentum
Building upon the last point, another mistake worth avoiding is overhauling your investment strategy based on short-term momentum drivers. If you are unfamiliar with cryptocurrency, it would be a bad idea to buy Bitcoin just because it is up so much in a short period. But if you did research and discovered that you want to own Bitcoin long-term, that's a different case.
Another example would be piling into hot tech stocks just because they are going up without doing research. That being said, there are valid reasons to invest in artificial intelligence themes. For example, seeing Nvidia continue to hold off the competition and sustain its ultra-high margins is highly encouraging. Similarly, we are seeing enterprise software companies like Salesforce that had been lagging the sector successfully monetize AI and break out to new highs.
The AI-driven rally is largely based on existing earnings growth -- not potential growth. However, you don't want to dive headfirst into red-hot AI stocks just because they are going up, but rather take the time to research the industry and find the companies you have the most conviction in and would be willing to hold through periods of volatility.
Be proactive, not reactive
Each year brings a new set of expectations, challenges, and fears. It's easy to get caught up and develop recency bias based on factors that seem to carry the most influence in a moment. While it's essential to be aware of these factors and how they can influence the companies you are invested in, it can be a big mistake to overreact to these factors.
For example, the new administration will bring policy changes that will likely impact corporate taxes, trade policy, energy policy, renewable energy tax credits, and more. Right now, there is no shortage of media devoted to speculating what the new administration will do, and that speculation can collide with markets to spur some highly volatile price action in various assets.
Making big changes to your portfolio based on near-term guesses isn't a good idea. A better exercise would be to look at the companies you are invested in and ensure they can do well no matter what administration is in charge. In other words, do they have the ability to endure challenges and even take market share during an industrywide downturn, or could their financials be squeezed or maybe even compromised? And if so, is that risk already baked into the price and something you're willing to accept?
Mistakes happen all the time
Every investor makes mistakes. And the longer you travel on your investment journey, chances are you'll build up your fair share of regrets, but hopefully also a consistent process for aligning your investments with your financial goals.
Now is a great time to take a deep breath and identify some mistakes you may be prone to making to prevent them before they occur.
