Tidy Up Your Portfolio for 2025: A Step-by-Step Guide

As we step into 2025, it's time to take a fresh look at your investment portfolio. Diversification is key to managing risk and maximizing returns, but it's easy to let your portfolio become cluttered with too many moving parts. In this article, we'll provide a step-by-step guide to help you tidy up your portfolio for the new year.

1. Rebalance your portfolio
* Start by assessing your overall asset mix. Most portfolios are likely heavy on stocks and light on bonds after the strong equity market rally in 2024.
* Consider rebalancing your portfolio by selling some of your winning stocks and using the proceeds to buy bonds or other defensive assets.
* This will help reduce your portfolio's risk level and ensure that you're well-positioned for any market downturns.
2. Diversify across asset classes
* While stocks and bonds are the mainstays of most portfolios, consider allocating a portion of your assets to alternative investments like real estate, infrastructure, or commodities.
* These assets can provide a hedge against inflation and protect against market downturns.
* For example, real estate investment trusts (REITs) provided a total return of 28.5% in 2024, outperforming the S&P 500's 25.2% return (Source: Nareit).
3. Be selective with government bonds
* Government bonds have had a difficult few years due to inflation fears and excessive government spending.
* When choosing government bonds, consider markets where inflation or fiscal risks are unlikely to hamper the ability of bond yields to fall.
* German Bunds are preferred over Gilts or Treasuries due to their more benign inflation backdrop, the European Central Bank's expected rate cuts, and the European Commission's oversight of fiscal policy (Source: "We prefer German Bunds on both accounts").
4. Allocate to real assets
* Real assets like real estate, infrastructure, and commodities can provide a hedge against inflation and protect against conventional safe havens becoming scarce.
* These assets have intrinsic value and are less susceptible to the erosive effects of rising prices.
* In 2024, the S&P GSCI Commodity Index returned 17.5% (Source: S&P Dow Jones Indices).
5. Consider healthcare stocks
* The healthcare sector has lagged the overall market in recent years and now trades at more attractive valuations.
* Investing in a diversified healthcare fund with low expenses can provide exposure to this sector while mitigating risks.
* In 2024, the Health Care Select Sector SPDR Fund (XLV) returned 18.2%, outperforming the S&P 500's 25.2% return (Source: SPDR).
6. Protect against inflation
* To protect against inflation, consider allocating a portion of your bond portfolio to Treasury Inflation-Protected Securities (TIPS).
* As of this writing, real yields on 10-year TIPS are about 2.2%, which is relatively attractive compared with previous levels.
* TIPS adjust their principal based on changes in the Consumer Price Index (CPI), ensuring that your investment keeps pace with inflation.



By following these steps, you can tidy up your portfolio for 2025, reducing risk, and positioning yourself for long-term success. Don't forget to regularly review and rebalance your portfolio to maintain your desired asset mix and stay on track towards your financial goals.

In this example, a portfolio with an initial asset mix of 60% stocks and 40% bonds has been rebalanced to a target mix of 50% stocks and 50% bonds after a strong equity market rally. This helps reduce the portfolio's risk level and ensures that it is well-positioned for any market downturns.