Cryptocurrency, Inflation, Bonds: An Investment Guide for a Year of Risks

Author: Suzanne Woolley, Bloomberg Businessweek

Compiled by: Luffy, Foresight News

This year is full of uncertainties. The artificial intelligence narrative that once drove the U.S. stock market is now being questioned; there is little consensus on how a second Trump administration would affect the finances of ordinary Americans, and whether we will see inflation rise again, putting pressure on stocks and bonds. To help navigate this unclear period, we consulted investment experts on some major questions investors face this year. While the year is fraught with risks, it could also yield returns if the right strategies are employed.

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

Michael Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan Asset Management, states that the S&P 500 has risen over 20% each year for the past two years, a phenomenon that has occurred only 10 times since 1871. Cembalest expects the stock market to rise by the end of the year, but he also notes that there could be a drop of up to 15% during the year, which he points out is not uncommon. Over the past 100 years, the S&P 500 has dropped 10% or more in 60 of those years.

Given the potential volatility in the market, a better question is: when will you need this money? Every drop is followed by a new high, so if you can wait a few years to cash out, you won’t face issues. Additionally, take a close look at your asset allocation. Simply holding the S&P 500 is not enough, as the top ten stocks (mostly tech stocks) account for about two-fifths of the index's market value, whereas this proportion was only about a quarter in 2000.

Ben Inker, Co-Director of Asset Allocation at GMO LLC, suggests a diversified approach by purchasing equal-weighted exchange-traded funds (ETFs) that track the index, where each company accounts for about 0.2% of the value. He says, "In the long run, this is a good way to avoid being overly caught up in any current investment craze."

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

For a long time, financial planners have recommended a 60% stock and 40% bond portfolio, which has provided decent returns over the past few decades with significantly lower risk than holding stocks alone. However, the logic behind this portfolio (that bonds rise when stocks fall, and vice versa) completely broke down in 2022. With soaring inflation and aggressive rate hikes from the Federal Reserve, both stocks and bonds suffered. Recently, U.S. stocks and bonds have often moved in sync.

An increasing number of investment managers suggest allocating part of the 60/40 portfolio to so-called alternative assets—private securities that do not move in tandem with public market assets. Adding these assets may introduce new risks but could also enhance long-term returns. Sinead Colton Grant, Chief Investment Officer at BNY Mellon Wealth Management, notes that companies are going public later, meaning public market investors miss out on the higher returns earned in the early stages. "If you don’t have access to private equity or venture capital, you will miss opportunities." She believes that to replicate the performance of the 60/40 portfolio from 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, states that adding private assets to a 60/40 portfolio "increases complexity and costs, and there are questions about how to value them." 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 it worth investing in U.S. Treasuries? Will the bond vigilantes return?

Bond vigilantes are large investors who demand higher yields on government bonds to express their dissatisfaction with government overspending. 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 mean higher Treasury yields are on the horizon.

Currently, the yield on the 10-year Treasury bond is about 4.6%, close to an 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 leaned towards locking in yields on five-year Treasuries. However, she believes that given UBS's expectation that economic growth will remain above trend but slow down, and inflation will decline, when the 10-year Treasury yield approaches 4.8% to 5%, it presents a good buying opportunity. As for the 30-year Treasury, she states, "Given the current volatility and policy uncertainty, we believe extending the investment horizon to 30 years at this yield level is not wise, as the risks do not justify the returns."

Of course, for those with high-yield savings accounts or one-year CDs, a 4.6% yield may not seem high, as these products can also offer similar returns. However, savings account rates can change at any time, and for CDs, there is no guarantee of receiving the same rate upon renewal after one year.

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

President Trump has promised to "defeat inflation," but at the same time, he is pushing for increased tariffs and tax cuts, which could exacerbate inflation. Amy Arnott, a portfolio strategist at Morningstar, states that for investors in their 20s and 30s, inflation may not be a major concern, as wages should keep pace with price increases over time, and stock values generally grow faster than inflation. Arnott believes, "Over the long term, stocks are one of the best hedges against inflation."

Those looking to retire in the next decade might consider specialized inflation-hedging tools, such as commodities. Arnott notes that diversified commodity funds may include oil, natural gas, copper, gold, silver, wheat, and soybeans. Recently, few such funds have performed well, so if choosing one, Arnott suggests comparing the risk-adjusted returns of such investments rather than focusing on absolute performance.

For retirees or those planning to retire soon (who cannot offset inflation through raises), Arnott recommends purchasing Treasury Inflation-Protected Securities (TIPS) linked to the Consumer Price Index. She advises buying 5-year and 10-year TIPS instead of 30-year ones, as the latter carries too much risk for those not planning to hold until maturity.

5. Should I include cryptocurrencies in my portfolio?

With a president who has launched a Memecoin and Treasury Secretary Scott Bessent revealing (and selling) his holdings in a cryptocurrency fund, cryptocurrencies are looking increasingly mainstream. Investors can now purchase cryptocurrency ETFs, with billions pouring into the newly established iShares Bitcoin Trust (IBIT), which has helped drive Bitcoin prices up nearly 60% in the six weeks following the election.

However, the long-term outlook for cryptocurrencies remains highly uncertain; for example, Bitcoin has recently retreated. Therefore, some advisors suggest that investors insisting on adding cryptocurrencies should limit their exposure to less than 5% of their portfolio; for those nearing retirement, this percentage should be even lower. Matt Maley, Chief Market Strategist at Miller Tabak + Co., states that younger investors can allocate a slightly higher percentage to cryptocurrencies, provided they balance the risk by investing in "cash-flowing, stable, reliable companies." "You wouldn’t want to have 10% in Bitcoin and 90% in tech stocks."

6. Has the AI bubble burst?

The two-year bull market in AI stocks took a hit this January when a chatbot developed by the startup DeepSeek forced investors to rethink some fundamental assumptions. DeepSeek claimed it could not obtain cutting-edge semiconductors, so it quickly developed a model using cheaper chips, which seemed to rival the models of U.S. AI leaders by some metrics. On January 27, shares of Nvidia, which dominates advanced AI chips, plummeted 17%, wiping out $589 billion in market value, marking the largest single-day drop in U.S. stock market history.

The possibility that AI does not require expensive chips has raised questions about the valuations of Nvidia and U.S. AI giants. Analysts are closely examining DeepSeek's model to verify its claims and assess whether the U.S. AI boom has peaked. It is certain that China's advancements in this technology are faster than many had imagined. Some investment managers see a glimmer of hope in DeepSeek, as if more companies and consumers can afford this technology, AI could have a greater impact. However, the high valuations of leading tech stocks have made some portfolio managers cautious about putting new money in, preferring to seek undervalued areas in the U.S. market, such as healthcare and consumer goods, or looking for better opportunities abroad.

7. How much will climate change impact my retirement plans?

The short answer: significantly. For the vast majority of retirees, home equity is their most valuable asset, especially if they have lived in their homes for decades and paid off their mortgages. Fully owning a home can provide security against housing costs, avoiding the uncertainty of rising rents in the future. However, with the increasing number of extreme weather events, the cost of homeowners insurance is steadily rising, making this logic seem less stable.

According to a study of over 47 million households, the average homeowners insurance premium adjusted for inflation rose by 13% from 2020 to 2023. However, many major insurance companies are no longer offering new homeowners insurance policies for high-risk areas or are only providing limited coverage—especially in sunny coastal communities, where Americans often spend their retirement years. For instance, in 2021, about 13% of voluntary homeowners and fire insurance policies in California were not renewed.

Clearly, more and more seniors feel they have no choice but to forgo insurance due to cash shortages. According to the Insurance Information Institute, the proportion of Americans without homeowners insurance has more than doubled since 2019, reaching 12%. "This puts retirees in a bind," says Daryl Fairweather, Chief Economist at real estate brokerage Redfin, "They either face high monthly premiums that could rise quickly or risk losing their homes."

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

Currently, the 30-year fixed mortgage rate is about 7%, which has pushed many homebuyers out of the loan market. Existing homeowners with old loans at rates of 3% or 4% have little interest in selling, as that would mean obtaining a new mortgage at today’s rates. Mark Zandi, Chief Economist at Moody's Analytics, states that due to the Trump administration's implementation of a series of policies that could lead to inflation, mortgage rates are unlikely to fall back to near 6% levels anytime soon.

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