5 Mistakes to Avoid With Your Investment Portfolio in 2025

Key Takeaways

• Investors who feel like they missed out on stocks’ phenomenal run should not rush to invest all their extra cash at one time.
• An easy mistake for investors to make is not globalizing their portfolios.
• Anyone who is getting closer to retirement, it is time to think about derisking your portfolio.
• Investors should not try to guess where interest rates are going to go.
• People should try to avoid getting complacent about inflation.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Stocks had an exceptionally strong year in 2024, but successful investors know they should look forward rather than look back. Joining me to discuss five key investment mistakes to avoid in the year ahead is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

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Nice to see you, Christine. Thanks for being here.

Benz: Good to see you, too, Susan.

Don’t Rush to Invest Extra Cash in Your Portfolio

Dziubinski: As I mentioned, stocks have had a phenomenal run in 2024 and had a pretty good 2023, too. You think a key mistake that investors might be making heading into 2025 is that feeling that they’re hopelessly late to the party. What should investors who have maybe more cash than they should on the sidelines do?

Benz: It’s an important point, Susan. I think sometimes we don’t talk enough about people who maybe got themselves into a defensive crouch with their portfolio or maybe they had some infusion of cash, and they’re kind of sitting back hearing people like our team saying, “Well, US equity valuations are kind of elevated.” But I think the key in that situation is that you do want to try to minimize regret. The way you do that is by not putting all the money in at one time, but you dollar-cost-average in over a period of months, not too long a period, assuming you have a reasonably long time horizon, but really get that money to work rather than sitting there worrying about whether the timing is right.

And then, another key sort of mistake to avoid related to that is, if you are putting new money to work, don’t drive with the rearview mirror where you’re going to put it all into the thing that has performed really well. Be careful there because chances are if performance recently has been excellent, valuations are somewhat elevated. So, diversification is your friend. And that goes for the timing of your contributions, as well as what you put the money into.

Why Investors Should Globalize Their Portfolio Through International Stocks

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Dziubinski: Somewhat related to that, you and others at Morningstar have been sort of pounding the table a little bit on international stocks, considering that they haven’t really kept up with US stocks, specifically of late. So, you think an easy mistake that investors could be making is not globalizing that portfolio the way perhaps they should be.

Benz: Right. I think this is particularly important for younger investors, people who have a long time horizon and can ride out some of the bumps that will inevitably accompany overseas investing. But it does appear that you get a lot of bang for your buck by doing some rebalancing from US into international and that you have lower valuations overseas. You have higher dividends if you care about dividends, higher dividends overseas. And then you also just get very different sector exposure with non-US equities than you do if you buy the US market. So, you get a lot less technology and healthcare, a lot more financials, a lot more industrials exposure. So, you’re getting a lot of diversification bang for your buck, too, if you do that kind of rebalancing.

Investors Nearing Retirement Should Derisk Their Portfolios

Dziubinski: Christine, those two mistakes are related more to the equity portion of your portfolio. Let’s talk a little bit more about your safer investments or your bonds. Who should be particularly attuned to building out positions in bonds and cash?

Benz: Well, I would say anyone who is getting a little closer to retirement. So, anyone over 50, if you are running with an all-equity portfolio, you’ve done very well with those heavy stock holdings. But it is time to think about derisking your portfolio, not entirely certainly, especially if you’re in your 50s you still need ample stock exposure.

But one thing that sticks in my mind is there is a chart that’s in one of my presentations that shows when people were asked when they thought they would retire, and when they actually retired. What we see is a disconnect. People think they will be able to hang on longer than they actually do, and some of that might be for happy reasons like their portfolio has performed really well. But just build your portfolio as you move into your 50s for a little bit of wiggle room in terms of how long you will continue to work. So, that means that building out your portfolios’ exposure to safer assets, especially bonds, maybe a little bit more cash, I think that makes a ton of sense. And yields are decent today. So, that means that the return prospects for those asset classes are also a bit better.

Don’t Try to Predict Interest Rates When Looking at Your Fixed-Income Exposure

Dziubinski: You think there are a couple of pitfalls to avoid, though, in the realm of these safer investments. One is trying to guess where interest rates are going to go. What do you mean by that?

Benz: This has not been a winning game for a lot of people over the past year or two years, where everyone thought yields were going to start dropping and bond prices would jump up. So, the establishment trade was to go long with your fixed-income exposure. Well, that hasn’t worked out that well.

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So, I would say just don’t be a hero with your fixed-income exposure. I like the idea of building a portfolio that consists mainly of high-quality bonds because they’re your best ballast in an equity market selloff. And then you also want a combination of short- and intermediate-term bonds. I don’t see a lot of reason to hold long-term bonds, mainly because when you look at their volatility, it’s pretty equitylike rather than bondlike because they’re so sensitive to interest-rate changes. So, hold a high-quality short- and intermediate-term portfolio and call it a day. Don’t try to get too cute in terms of your positioning.

Don’t Get Complacent About Inflation

Dziubinski: And then the last mistake you think people should really focus on trying to avoid in 2025 is this idea of getting complacent about inflation. Talk about that.

Benz: I think that it’s a risk. In fact, we’re starting to see some signs of concern over inflation in the market. I think you want to make sure that your portfolio does include exposure to inflation-defending investments. One great thing is that a very simple answer to defend against inflation long term is just to hold stocks, which have a really great track record of beating inflation over long time periods.

And then if you have fixed-income assets in your portfolio, you definitely want to make sure that they are somewhat secured against inflation. That would mean adding a component of Treasury Inflation-Protected Securities, perhaps I bonds. And that’s especially important for people who are no longer working and earning a paycheck from their jobs. But build in that inflation-protected bond exposure to the extent that you have bonds in your portfolio.

Dziubinski: Well, Christine, thanks for your time today and for keeping us on track and avoiding these pitfalls in 2025. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch Retirees, Here’s What Your Withdrawal Rate Should Be in 2025 for more from Christine Benz.