2025 is full of uncertainties, but with the right strategy, returns are possible.

This year is full of uncertainties. The AI narrative that once drove the U.S. stock market is now being questioned; it’s still unclear how a second Trump administration will affect the financial situation of ordinary Americans, and whether we will see inflation rise again, putting pressure on stocks and bonds. To help investors navigate through this uncertain period, we consulted with investment experts about some of the major challenges investors will face this year. Although this year is full of risks, the right strategy could yield returns.

1. How likely is a significant drop in the S&P 500 Index this year? How should I prepare?

Michael Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan Asset Management, says that the S&P 500 Index has increased by more than 20% annually in the past two years, a feat that has occurred only 10 times since 1871. Cembalest expects the market to rise by the end of this year, but he also notes that there may be a decline of up to 15%, which is not uncommon. Over the past 100 years, the S&P 500 Index has fallen 10% or more in 60 years.

Given the potential for market volatility, a better question to ask is: when will you need the money? Every dip is typically followed by a new high, so if you can wait to cash out for a few years, you shouldn’t face any problems. Also, carefully examine your asset allocation. Simply holding the S&P 500 Index is not enough, as the top ten stocks (mostly tech stocks) account for about two-fifths of the index’s market value, compared to about a quarter in 2000.

Ben Inker, Co-Head of Asset Allocation at GMO LLC, suggests a diversified investment approach by buying exchange-traded funds (ETFs) that track an equal-weight version of the index, where each company makes up about 0.2% of the value. He says, “In the long run, this is a good approach to avoid getting overly caught up in any current investment craze.”

2. Does the traditional 60/40 portfolio still make sense?

For years, financial planners have recommended a 60% stock and 40% bond portfolio, which has provided good returns with lower risk than holding stocks alone. However, the logic behind this portfolio (i.e., when stocks fall, bonds rise, and vice versa) completely broke down in 2022. With inflation soaring and the Federal Reserve aggressively raising interest rates, both stocks and bonds were hit. Recently, U.S. stocks and bonds have often moved in tandem.

More investment managers are now suggesting allocating part of the 60/40 portfolio to so-called alternative assets—private securities that do not move in sync with public market assets. Adding these assets might introduce new risks but could also boost long-term returns. Sinead Colton Grant, Chief Investment Officer at BNY Mellon Wealth Management, says that companies are listing later, meaning public market investors are missing out on the higher returns earned in the earlier stages of a company’s growth. “If you don’t have access to private equity or venture capital, you’re missing opportunities.” She believes that to replicate the performance of the 60/40 portfolio in the late 1990s, private securities should make up about a quarter of the portfolio.

Not everyone agrees with this view. Jason Kephart, Director of Multi-Asset Ratings at Morningstar, says that adding private assets to a 60/40 portfolio “adds complexity and costs, and the valuation methods are questionable.” He argues that the strength of the 60/40 strategy lies in its simplicity, making “it easier for investors to understand and stick with the portfolio over the long term.”

3. If I am risk-averse, is U.S. Treasury debt worth investing in? Will bond vigilantes return?

Bond vigilantes are large investors who demand higher yields on government bonds to express their dissatisfaction with excessive government spending. While the details of the new government’s spending plans are unclear, there are concerns that the U.S. budget deficit will worsen in the coming years, which could lead to higher Treasury yields.

The current 10-year Treasury yield is around 4.6%, close to a 18-year high. So should investors seize this opportunity? Leslie Falconio, Head of Taxable Fixed Income Strategy at UBS Global Wealth Management, says that until recently, the firm was inclined to lock in the yield on 5-year Treasuries. However, she believes that, given UBS’s expectation that economic growth will stay above trend but slow, and inflation will decline, a yield of 4.8% to 5% on 10-year Treasuries represents a good buying opportunity. As for 30-year Treasuries, she says, “Given the current volatility and policy uncertainty, we think it’s unwise to extend the investment horizon to 30 years at this yield level, as the risk-reward ratio is not favorable.”

For those with high-yield savings accounts or one-year certificates of deposit, a 4.6% yield might not seem high since these products also offer similar returns. However, savings account rates can change at any time, and with certificates of deposit, you cannot guarantee the same rate when renewing after one year.

4. How can I protect my assets from rising prices?

President Trump promised to “defeat inflation,” but at the same time, he is pushing for higher tariffs and tax cuts, which could exacerbate inflation. Morningstar portfolio strategist Amy Arnott says that for investors in their 20s and 30s, inflation might not be a major concern because, over time, wages should keep up with rising prices, and stock values typically grow faster than inflation. Arnott believes, “In the long run, stocks are one of the best hedges against inflation.”

Those planning to retire in the next decade might consider dedicated inflation-hedging tools like commodities. Arnott says diversified commodity funds could include oil, natural gas, copper, gold, silver, wheat, and soybeans. Recently, few of these funds have performed well, so if choosing one, Arnott recommends comparing the risk-adjusted returns of these investments rather than focusing on absolute performance.

For retirees or those planning to retire soon (who cannot offset inflation through salary increases), Arnott recommends purchasing Treasury Inflation-Protected Securities (TIPS) tied to the Consumer Price Index. She suggests buying 5-year and 10-year TIPS rather than 30-year TIPS, as the latter presents too much risk for those who do not plan to hold them to maturity.

5. Should I add cryptocurrency to my portfolio?

With a president who launched a Memecoin and Treasury Secretary Scott Bessent disclosing (and selling off) his cryptocurrency holdings, cryptocurrencies are increasingly becoming mainstream. Investors can now buy cryptocurrency ETFs, and billions of dollars have poured into the iShares Bitcoin Trust (IBIT), which was launched just a year ago, helping drive Bitcoin’s price up nearly 60% within six weeks after the election.

However, the long-term outlook for cryptocurrency remains uncertain; for example, Bitcoin has recently pulled back. As a result, some advisors suggest that investors who insist on adding cryptocurrency should limit their exposure to less than 5% of their portfolio, with an even lower percentage recommended for those nearing retirement. Miller Tabak + Co. chief market strategist Matt Maley says that younger investors can afford a slightly higher allocation to crypto, but they should balance the risk by investing in “cash-flowing, stable, and reliable companies.” “You wouldn’t want 10% in Bitcoin and 90% in tech stocks.”

6. Has the artificial intelligence bubble burst?

The two-year artificial intelligence stock bull market took a hit in January, following a chatbot developed by the startup DeepSeek, which forced investors to reconsider some basic assumptions. DeepSeek claimed it could not access advanced semiconductors, so it quickly developed a model using cheaper chips, which seemed to match up to the models of U.S. AI leaders in some indicators. On January 27, shares of NVIDIA, which dominates advanced AI chips, plummeted by 17%, wiping out $589 billion in market value, the largest single-day loss in U.S. stock market history.

The possibility that AI might not require expensive chips has raised questions about the valuations of NVIDIA and other U.S. AI giants. Analysts are carefully studying DeepSeek’s model to verify its claims and determine whether the U.S. AI boom has peaked. It’s certain that China’s progress in this technology is faster than many expect. Some investment managers see a glimmer of hope in DeepSeek, as more companies and consumers being able to afford this technology could have a greater impact on AI. However, the high valuations of leading tech stocks have made some portfolio managers cautious about putting in new funds, instead favoring undervalued areas of the U.S. market like healthcare and consumer goods or seeking better opportunities abroad.

7. How much will climate change affect my retirement plan?

Short answer: A lot. For most retirees, home equity is their most valuable asset, especially if they’ve lived in the house for decades and paid off the mortgage. Fully owning a home provides protection against housing costs and avoids the uncertainty of rising rents. But with the increase in extreme weather events, home insurance costs are climbing, and this logic seems to be weakening.

According to a study of more than 47 million households, between 2020 and 2023, the average home insurance premium increased by 13%, adjusted for inflation. However, many major insurance companies are no longer offering new home insurance policies in high-risk areas or only offering limited coverage, especially in sunny coastal communities, where Americans typically spend their later years. For example, in 2021, around 13% of voluntary home and fire insurance policies in California were not renewed.

Clearly, more seniors are feeling forced to drop insurance due to cash shortages. According to the Insurance Information Institute, since 2019, the percentage of Americans without home insurance has more than doubled to 12%. “This puts retirees in a difficult position,” says Redfin chief economist Daryl Fairweather. “They either face high, rapidly rising premiums each month or risk losing their home.”

8. Will housing become more affordable in the short term?

The current 30-year fixed mortgage rate is around 7%, pushing many homebuyers out of the loan market. Current homeowners with old loans at 3% or 4% have little interest in selling because it would mean taking out a new mortgage at today’s rates. Moody’s Analytics chief economist Mark Zandi says that due to the series of policies being pushed by the Trump administration that could lead to inflation, mortgage rates are unlikely to drop back to near 6% levels soon.

The vacancy rate for lower-priced homes (under $400,000) is about 1%, close to historic lows. This signals that both the residential sales and rental markets will continue to see high prices. Don’t expect new homes to meet demand, as immigrants (who faced the risk of deportation under the Trump administration) make up nearly a third of the construction workforce, with about half lacking legal status. Zandi says, “Housing will remain unaffordable this year and for the foreseeable future.”

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