We just finished another blowout year for the market, with the S&P 500 (^GSPC -0.03%) up more than 20% for the second year in a row. Market momentum is high as inflation and interest rates are both changing direction, and consumer spending remains strong.
Can the market keep it up in 2025? Yes. Can anything happen to upend market gains this year? Of course. No one knows what will happen this year, which is why there are certain crucial things every investor needs to keep in mind at all times, no matter what's happening in the market: Keep your eye on your goal, let the magic of compounding supercharge your funds, and don't panic sell.
To help you navigate the market this year under any circumstances, here are four things every investor should do.
1. Maintain a well-diversified portfolio
The first step toward successful investing is diversifying your portfolio. A properly diversified portfolio has about 25 to 30 stocks that are diversified in a number of ways. You want some growth stocks and some value stocks, some new stocks that have a lot of potential, and some well-established stocks that anchor your portfolio in a storm. You also want to spread your risk around different industries, since industries often face similar challenges and move together.
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Of course, each portfolio will look different depending on many factors. In general, it makes sense to invest in companies and industries that you understand and believe in, so each individual's holdings should reflect that reality.
Some investors have more of a growth mindset, while others will stick to higher-value stocks. Typically, younger investors with a longer time horizon who are building up their nest egg will veer toward growth, while investors heading toward retirement will want safer stocks that help maintain the wealth they've built. Retirees often invest in dividend stocks to provide passive income.
If you have a nice mix of stocks, you'll be able to benefit from growth if the market goes up this year, but your holdings will be protected if it doesn't.
2. Keep cash ready for bargains
No one likes to envision a market crash, but there are benefits for investors in those times, too. Taking a step back, market crashes and corrections are part and parcel of investing in the stock market, and investors need to embrace those possibilities, which are really eventualities.
The next step is keeping some cash on hand at all times to scoop up bargains when prices fall. It doesn't have to come from a market crash; a stock price can fall after some bad news, which could be a short-term reaction, and the company's underlying fundamentals are still strong.
As part of this strategy, do your due diligence, and be prepared to buy stocks that you've researched and know are excellent long-term bets. Then you can be confident when buying stocks that everyone else is panic-selling.
3. Don't be afraid of AI
Artificial intelligence (AI) was one of the market's major drivers in 2024, and that's likely to happen again this year. AI is creating tremendous opportunities in almost every industry, and the companies that are making it happen, as well as using it most effectively, are benefiting. Companies like Palantir Technologies and Nvidia were some of the biggest gainers last year, and they're far from finished.
If you have a low risk tolerance, you can still invest in the potential of AI through established winners like Amazon and Microsoft, which are both developing AI businesses that complement their reliable tech platforms.
Going back to the beginning, if you are careful to keep a diversified portfolio, you should be able to manage the risk of AI by balancing higher-risk stocks with some high-value stocks, giving you an effective way to benefit from both.
4. Build your patience muscles
Even though there's no way to know what kinds of euphoric or catastrophic things could sway the markets in 2025, what you can be confident about is that over the long term, the market is likely to reward investors who have patience.
There are many clichés that help bring the point home, but one of my favorite ways of looking at it is what Peter Lynch said and Warren Buffett quoted: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds." If you have chosen a strong mix of winning stocks, hold on, and don't let market ups and downs sway you. Whatever happens this year or any, you'll come out on top.
