I wanted to add some color to a comment I made last week about not using crypto or precious metals as a place to store short-term cash. It’s not that these can’t be good longer-term speculative investments, just that each category is far too volatile for keeping your cash “safe”. That’s ironic because safety is one of the main justifications for owning both categories. But safety from inflation and eventual debasement of the dollar, and host of other reasons such as market structure and trading issues, are very different from ensuring your cash is available in the right amount when you need it (= safe).

First, I admit it’s tempting to buy into an investment that’s been doing extremely well. “The trend is your friend,” and other sage sayings of the investment world can be convincing enticements to just make a little extra on your cash over the next few weeks, few months, etc, before buying that car or paying your kid’s next tuition bill. These days you’re validated by friends and colleagues who’ve done the same thing. Plus, you have influencers on the socials (with expertise/opinions often tainted by conflicts of interest that can be difficult to see), and even big business and government, whose rallying cries get louder as prices rise.

You’re also validated by recent performance. Depending on when you bought your bitcoin, gold, or silver, for example, it would have done extremely well for a while. But would your timing have been right when you needed to sell to cover whatever your expenses were? Would you have sold bitcoin early last October when its value was high? Or would you have held a little too long and were forced to sell after the value had dropped nearly 40% by last weekend?

Then there are precious metals like gold and silver that trade nearly round the clock. (Bitcoin trades 24/7, but trading access to crypto and precious metals depends on how you own them, directly or via a fund that holds the actual “thing” versus futures contracts – it’s complicated.) Both have been popular lately and beat the S&P 500’s return over the last couple of years. But much of that performance occurred just last year, even last month. Prices went parabolic before having a rough go last week, Friday especially. This outperformance and subsequent decline were caused by a variety of factors having little directly to do with the fundamental value of either metal.

I mention all this not as an, “I told you so”, sort of chiding. The price of bitcoin and both metals have risen from their lows so far this week. Instead, it’s another in a long list of reminders the markets throw at us about the importance of drawing clear lines between what should be three buckets of money within your broader household portfolio: short, medium and long-term.

When storing short-term money, we simply must acknowledge the opportunity cost that comes with it. Sure, make cash work as hard as possible, but this should be done without meaningful market risk. Think of bank and brokerage CDs, and government bonds maturing in a year or less. This money shouldn’t be expected to earn what risky asset classes might earn because those are subject to wide volatility swings and come with a risk premium, and cash investments don’t. Blur those lines at your own risk.

But once we have our cash needs covered, we should venture into the realm of risk because, at least in theory, we can afford to wait out market volatility. This can be where a medium-term bucket, like an enhanced emergency fund, comes into play. Certain types of bonds with specific maturity dates can work well for this money. Or mutual funds that only buy bonds of appropriate maturities. These options usually have a higher return than cash because there’s some market risk. But the risk is less than investing in stocks and so is the expected return.

Beyond that your options are wide open. Stocks certainly, but also alternative asset classes like real estate, crypto, and precious metals if those appeal to you. All things in moderation as the saying goes, and don’t neglect diversification. Your strong conviction about these alternatives could play out within your retirement account, especially your Roth IRA, because those account types are built for the long-term and are tax advantaged. How much should you invest in alternative asset classes? Prudence suggests maybe 5% of your portfolio, but you might exceed this if you’re closely monitoring things and have your other bases covered. And if you’re paying attention, large price declines can be a time to stock up because it’s a long-term account, right?

Ultimately, every saver should at least have the short and long-term buckets working for them, perhaps adding medium-term as their personal financial complexity grows. Just keep them separate, even if in the same account. Knowing your limits should make volatility within parts of your portfolio easier to stomach because your cash needs are met without having to sell a risky investment at the wrong time.

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Market strategists are expecting a continued strong stock market this year, but what are we supposed to do about it? How is the answer different if you’re continuing to save versus spending during retirement?

One obvious answer if you’re still saving is to keep buying. Stocks, of course, and this is even more true when the market is volatile. The answer gets complicated if you’re retired or planning to retire soon, so we’ll save that for next week.

IRA contribution limits for 2026 are $7,500 for those younger than 50 and $8,600 for those 50 or older. If you’re still funding for 2025, the limits are $7,000 and $8,000, respectively.

401(k) limits for this year are $24,500 with an over 50 catch-up of $8,000, plus $11,250 more if you’re aged 60-63.

So, you have room to save if you can afford it, but what do you buy?

If your aim is to invest in the US stock market, you’d usually buy an S&P 500 index fund, a “large cap” US fund, or total market fund. By far, index funds are the most straightforward way to access the stock market, and I’ve been using them for a long time. For good reasons, asset growth of these funds has more than doubled in the last ten years to something like 40% of all fund assets.

That said, S&P 500 index funds track the 500 largest stocks traded in the US across 11 sectors and (typically) simply organize them by size, regardless of their sector. For a while now, index performance has been driven by the Technology and Communication Services sectors, since that’s where the AI and AI-adjacent companies live and that’s what investors are excited about. Taken together as of last Friday, those two sectors are worth 46% of the S&P 500. Of that, 35% is the Tech sector, which itself is dominated by AI-related names. NVIDIA, Apple, Microsoft, Broadcom, and Micron Technology collectively make up nearly half of the Tech sector, while NVIDIA, Apple, and Microsoft alone represent 38%.

The combined 46% market weight of these two sectors was almost this high during the Tech Bubble, but we’ve also seen it move around a lot, even to less than half that if we look back over a few decades. The two sectors comprised barely 15% of the S&P 500 before Netscape’s ill-fated browser and Microsoft’s Internet Explorer were launched in the mid-90’s, and around 30% pre-Covid, for example. Our economy has changed a lot over that time span, and many argue that the growth of these two sectors shouldn’t be worrisome because it represents our evolution as a tech-based economy.

While that makes sense, one of the issues for investors is knowing what you’re buying and how the holdings and risk profile of these index funds change over time. The Tech sector itself, for example, has different top holdings than ten or 20 years ago and is about 50% more volatile than the S&P 500. This extra volatility feeds into the broader index and helps to amp up risk as the Tech sector weighting grows. In other words, the S&P 500 fund you bought a decade ago looks different today and is often more volatile.

So, if you’re still growing your nest egg, having most (or all) of your money in a broad US stock market fund has worked and will work because it’s primarily a bet on our economy, and for all our bumps and bruises it’s long been a bad idea to bet against America. That said, at least in the near term it’s also looking like more of a bet on the future of AI. At this point slightly more than half of the S&P 500 is still invested across nine other sectors, but will we see that flip to AI-related sectors not just driving performance but also holding most of the index value? It’s possible.

Interestingly, that balance has shifted over the last few months. S&P 500-based funds that “equal-weight” their holdings instead of by size have been outperforming the traditional version, and dividend-oriented funds that naturally avoid the big tech names, have also been outperforming. This may be some reasonable reshuffling after such a good run, but it’s also a reminder that there are 11 sectors, not just two.

I guess the point I’m endeavoring to make is that index funds are useful tools for accumulating wealth, but they’re continually changing beneath their static label. It’s best to understand those changes to know what your investment exposure is within the fund or funds you own, if it’s still appropriate for your situation and what you might be missing, all while keeping the peddle to the metal when it comes to saving.

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Although the stock market closed the fourth quarter (Q4) with a bit of a whimper, last year was a good one. We saw surges of volatility throughout, especially in the second quarter, but much of the year was surprisingly quiet (at least in terms of volatility) and productive, with major indexes gaining double digits. The evolving AI landscape continued to lift markets while news of tariffs and shifting expectations for interest rates acted as counterweights. Myriad issues impacted investor psychology during the year, such as federal government layoffs, a federal shutdown, and potential problems at the Social Security Administration, but these didn’t have a direct impact on markets.

Here's a summary of how major market indexes performed during the quarter and for the year, respectively.

• US Large Cap Stocks: up 2.4% and up 17.7%
• US Small Cap Stocks: up 2.3% and up 12.7%
• US Core Bonds: up 0.5% and up 7.1%
• Developed Foreign Markets: up 4.8% and 31.6%
• Emerging Markets: up 5.5% and 34%

US stocks had a respectable Q4 and solid 2025. While it seemed like anything related to AI rose during the year, actual performance was mixed. The so-called Magnificent Seven stocks were up nearly 28% for the year as a group, but that average return spans Alphabet (Google) rising over 65% to Amazon climbing about 6%. Collectively these mega-cap stocks comprise over a third of the benchmark S&P 500’s market value, so their outperformance lifts the market average. At least within indexes containing a large weighting to these stocks. Indexes that don’t, such as the Dow 30 and others that organize holdings equally instead of by company size saw returns last year of 14% and around 10% or 11%, respectively. Across sectors, Tech and Communication Services, where most of the AI exposure resides, each rose by over 20% last year while most other sectors were up by the mid-teens. Only two of the eleven sectors, Consumer Staples and Real Estate, were down on the year but only by around 1%.

While US stocks got most of the news, foreign markets outperformed handily. This followed years of underperformance and was primarily driven by the US dollar having its worst year since 2017. Also, better stock valuations and fiscal stimulus by foreign governments helped, and massive investment in AI benefitted certain Asian markets. Tariff announcements by the Trump administration during April also helped, albeit indirectly. Tariff concerns were percolating in the markets as 2025 began, allowing foreign stocks to outperform during the first quarter. Then April hit and foreign markets were seen as a haven while the US market experienced a correction. Markets quickly rebounded in the US, losing less than a percent during April after being down nearly 15% at one point. But at their worst in April foreign stocks, as measured by the MSCI EAFE index, were only down about 3%. That was a springboard for the rest of the year that otherwise tracked with the S&P 500. Gold and other precious metals also benefited from some of these issues. A common fund tracking major metals returned almost 70% for the year and silver rose by a whopping 145%. These returns also reversed multi-year periods of underperformance.

Tariff-related fears largely subsided over the following months as the Trump Administration repeatedly backpedaled from its original sweeping tariff plans. This allowed investors to mostly look beyond recession fears that appeared overnight during April. The focus shifted to the seemingly more pressing issue of the Federal Reserve’s interest rate policies. Markets had “priced in” multiple rate reductions by the Fed during 2025 and investors mostly got what they wanted. The Fed reduced short-term rates by a quarter point three times, which lowered borrowing costs for some in the economy and helped provide a tailwind for the stock market. But longer-term rates, which the Fed doesn’t directly control, rose into year-end and kept borrowing costs on mortgages, for example, stubbornly high. As of this writing, the Fed is expected to lower rates again maybe twice in 2026, but that’s a moving target. These shifting but generally positive expectations also helped the core bond market, which returned around 6% to 8% in 2025, depending on maturity period and issuer type.

Otherwise, we begin 2026 with low risk of recession and analysts, at least on average, are targeting around a 10% annual return for the S&P 500. They’re slightly more bullish for this year than usual and that’s mostly due to the economic tailwind from massive AI-related investment lasting a while longer – maybe that’s Pollyannish but that’s the environment we’re in – excesses can last awhile. So, we should take these predictions with a grain of salt and some even see them as a contrarian indicator. Still, it’s helpful to know what Wall Street is expecting.

While I’m optimistic about 2026, it’s prudent to expect amped up market volatility. Analysts are bullish on stocks and that’s great, but retail investors have been bearish on the markets and economy for some time, even as markets trended higher. How much of this is based on headlines that have little directly to do with the markets is debatable. But there’s no doubt that uncertainty around social, financial, and economic issues is elevated in many households and boardrooms around the world. That’s nebulous as a catalyst but fosters an environment where larger market swings are just a headline away, so be prepared for it. The financial side of preparedness is straightforward, involving carefully and continually reviewing your portfolio for rebalancing opportunities while ensuring your money is always in the right place. The emotional side is harder, of course, and is why being a long-term investor is so difficult.

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Last week we talked about market predictions for this year and what they mean (more or less) for current savers. This week let’s review how this relates to retirees and those nearing retirement.

In a sense, savers have it easy; it’s all about accumulation. Buy shares, monitor, rebalance, and let the power of compound interest work its magic. Making the transition from saving to spending is more complicated, however, so let’s dive into some of the details for this year.

Assuming you have a balanced portfolio of stock and bond investments, the first step in planning for the year ahead should always be assessing near-term spending needs. This is a critical step that many investors avoid for various reasons. One of those is figuring out what to do with cash so let’s start there.

First, “cash” in this context refers to ready cash at the bank and cash equivalents like money market funds, bank CDs, and US Treasuries maturing within 12 months. The investment return, or yield, on cash has moved around quite a bit in recent years, from near-zero during Covid to maybe 5% a couple of years ago, to around 3.5% now. That’s a lot of movement that can leave some investors feeling like they’re always behind the curve.

That said, while I’m a believer in trying to maximize your cash as much as possible, the return on your cash is ultimately less important than the return of your cash when you need it.

A big part of the yield swings on cash has to do with changes in Federal Reserve policy. The Fed controls a short-term interest rate benchmark that drives much of the market (and economy) and they’ve lowered this a few times in their current easing cycle. Currently, the market is expecting the Fed to lower its rate benchmark by another quarter to half percentage point this year. This means yields on cash are likely to continue lower, assuming everything plays out according to expectations (which can be a big assumption).

So, what should you do about generating cash from your portfolio?

First, I suggest totaling up what you might need from your investments this year. Then subtract expected portfolio income like dividends and interest. I have all this information for clients, and your brokerage firm should as well if you’re managing your own portfolio.

In general, the current dividend yield of the S&P 500 is about 1.1%. Your yield might be different depending on when you bought shares, so you’ll want to check. Large Cap dividend-oriented funds pay close to 5% and core bonds pay about 4.2%. Bank CDs or Treasuries might still be paying 4% or so based on when you bought them but currently pay around 3.5%. Depending on your portfolio mix, all this might average out to 2% or 3% average cash flow over a year.

If that’s all you need and it’s happening in the right type of account, then that’s great. But for many people it’s not quite enough and happens across multiple account types, so they need to sell investments to cover the difference.

If so and going back to recent weeks when we’ve talked about (potential) excesses in the AI-related world, now is a great time to trim back your stock positions weighted to this area. Trimming can be accomplished through selling some of your S&P 500 index fund, total market fund, or other large cap stock fund, especially if it holds more tech exposure.

How much do you sell? I suggest trimming back to your target large cap stock weighting, assuming you have one. At the sector level, I suggest targeting around 25% of your stock exposure to Tech and around 5% or so to Communication Services, dropping about a third off what the S&P 500’s weighting is for the two sectors now and looking more like it did before the AI craze took off. Then if you need more cash, look at other parts of your allocation that could be out of whack, such as foreign stocks, and trim those back to target weightings. Beyond that you can sell bonds or sell across your portfolio while emphasizing trimming from stocks.

Now, this is all relatively straightforward within a retirement account because you don’t need to worry about capital gains and losses. The downside is that every dollar you withdraw from an IRA or 401(k), for example, is taxed as ordinary income. Because of this, know that you can and should protect money within your retirement account for future spending, but that doesn’t mean you have to take it out all at once. If you’re of RMD age, certainly take that as a minimum, but try not to take more than you really need each year since it’s all taxable.

If you’re trimming stocks within your non-retirement account, always check your cost basis information first. Are you selling something at a gain? If so, do you have different “lots” to sell at lower gains, or perhaps you have losses that could offset gains? Perhaps you’ll decide to keep the overweight positions in your non-retirement account for tax reasons and sell from your IRA instead. That adds complexity to the process but it’s not too bad and I can help if you’re DIYing it.

Okay, now you’ve set aside cash for the year. What do you do with it in the meantime?

As I mentioned already, yield is secondary to having liquidity accessible where and when you need it, but it’s a strong second! Try to make your cash work as hard as possible in the context of keeping it safe. To me, this means no crypto and precious metals because they’re way too volatile and avoid investments that tie up your money like cleverly sold annuities. This leaves us with three categories, but really two right now:

Money market mutual funds – Schwab’s Prime Advantage currently pays about 3.5% and Vanguard’s Cash Reserves pays about 3.6%. These are just two examples of many that show you where the market is. Look at the “7-Day Yield” for your available options as a standardized way to see what they’re paying now. Remember the yield isn’t guaranteed for any timeframe and should be expected to change along with Fed policy and the market in general. (Workplace plans usually have a “stable value” option instead of a money market fund, but it’s the same thinking.)

Bank CDs – I’m seeing 1yr CDs at about 3.75% this morning and US Treasurys at about 3.6%. To me, these are interchangeable when we’re talking about short-term maturities. Yields are guaranteed to their individual maturity dates and federally insured in the case of CDs. Just hold these until the maturity date and volatility isn’t an issue. Check with your bank as well, but you can easily and cheaply buy either within your IRA and non-retirement account at competitive yields.

The bond market – Typical short-term bond funds like Vanguard’s ticker symbol BSV are paying essentially the same as other cash instruments but with some market risk and no specific maturity date. While they also come with some upside, I suggest avoiding bond funds for your short-term cash because of the market risk.

There you have it. Hopefully this helps as you do your portfolio planning. I’m doing these sorts of things for my ongoing clients every day and can help you if needed. Otherwise, good luck as we navigate what’s already shaping up to be a positive but volatile year.

Have questions? Ask us. We can help.

Last week we discussed Wall Street expectations for 2026 being a bit loftier than normal. Of the 18 firms tracked by my research partners at Bespoke Investment Group, all are expecting positive returns for the S&P 500 this year, from gains of a few percent to the high teens. Regardless of the specific numbers, it’s good know what these firms think, even if some consider such consensus a contrarian indicator. So, I wanted to dig into those predictions a bit this morning.

First up is, “Equities, Bubble or Boom?” from JPMorgan simply because they’re first in my inbox. The title says it all and is essentially where most analysts are at this point. While JPMorgan thinks we’re on track for another year of double-digit gains for the stock market, the AI bubble question dominates the list of risks. Earnings growth for the Magnificent 7 keeps being revised upward while the rest of the S&P 500 is being revised down. This means, at least in general, that strategists expect another year when performance from a handful of AI-related stocks (The Mag7 has expanded to maybe ten stocks) lifts the whole market. The gist is that these companies managed to grow so strongly last year amid a middling economy that they should be able to repeat due to continued massive infrastructure investments, having ample cash (on hand and via borrowing capacity) and increasing demand for AI services. The strategists suggest that “… bubbles burst into nothing, but the AI theme is building real infrastructure to meet growing demand.” Further, “The stakes are high, and visibility into the ultimate winners limited, but this looks less like a bubble and more like the tumultuous beginnings of a structural transition.” We’ll see…

Next, we have Morgan Stanley, who is bullish for 2026 and whose forecasts tend to be pretty accurate. Morgan says the US should outperform the rest of the world, which flips the script from 2025. They expect a 14% return from the S&P 500 but, as I mentioned previously, the exact number is less important than the trend. Like other analysts, Morgan sees the trend continuing with several tailwinds for stocks coming from market-friendly fiscal policies, expected interest rate cuts from the Fed, and continued investment in AI infrastructure.

Then we have predictions from Schwab strategists who tend to be conservative, which is a good check on a sometimes-exuberant industry. Schwab seems more focused on stock prices being too high in a US market that’s still being driven largely by the handful of companies already alluded to. This leads to a low margin for error and potentially amped up volatility, but within the context of a market that can churn higher. Schwab still expects more from foreign markets like Europe due to better valuations, higher dividend yields, and domestic spending plans in countries like Germany, so that’s interesting as well.

Last, we have my research partners at Bespoke Investment Group. They suggest that prices are high, but fundamentals are generally good. And we’re starting to see more companies performing better, both AI-related but also in other sectors and styles, such as small caps and dividend-oriented stocks. Rotations into and out of industries, sectors, and styles are healthy but can be unsettling.

Like JPMorgan, Bespoke reminds us that “toeing the line” isn’t in the market’s character. Following the 23 times when the S&P 500 was up from 10% to 20% in a year, median gains the following year were nearly 12% with positive returns 70% of the time. That sounds good but it has only happened three years in a row a few times. And based on market history, the tech-heavy NASDAQ has had five other runs like the last three years and, in year four, was up twice and was down three times, one of which was a 33% drop in 2022. Couple that history with the potentially contrarian indicator of how bullish strategists are and it’s best to expect a bumpy ride this year even amid positive returns.

Also from Bespoke is a summary of the firm’s 2026 Investor Sentiment Report. Interestingly, participants reported the biggest risk for market returns being an economic downturn, even for those who are bullish on stocks. This risk was followed in order of importance by the political environment and persistent inflation. “Other” was tied with “AI bubble” for last place. If anything, this underlines the nervous optimism pervading many positive market predictions right now.

To summarize… while these are only predictions and there are naysayers, most strategists are not expecting the AI Bubble (if we should even call it that at this point?) to pop this year. They’re also not expecting a recession. The US stock market, or at least parts of it, is expensive but still worth it based on growth prospects. And it’s prudent to expect more volatility this year.

So that’s the direction I’m headed in but not blindly. I’m spending even more time fretting over portfolio allocations and looking for rebalancing opportunities based on what the market is doing and not simply based on a calendar. I suggest you do the same if you’re managing your own portfolio.

In the coming weeks we’ll look at other market predictions and scenario-based ways to prepare.

Have questions? Ask us. We can help.

Good morning! This is a quick note as I sign off from these posts for the remainder of 2025. I'll still be working, of course, just taking a little more time to be with family and friends this holiday season. I hope you get to do the same! I'll be back at it during the first week of January with my Quarterly Update. Until then, happy holidays to you and yours. 

- Brandon