Investment Outlook for 2025
Happy New Year from all of us at Windsor Wealth! As we step into 2025, it's a moment to reflect on where we stand and what we can expect. The previous year showed us that corporate America's resilience can lead to growth, with profit margins up by 8%, thanks in part to AI starting to allow companies to reduce costs, and there is good chance that corporate profit margins will increase again in 2025.
AI's influence is undeniable, transforming businesses across various sectors. Our approach isn't to chase individual AI successes because in a new exciting field, choosing winners is like trying to pick the winner of a horse race. We can win for sure by diversifying to certainly capture the broad benefits AI brings to the economy.
Navigating Market Valuations
Although markets are trading at high valuations, particularly with the biggest names, there's a silver lining. Outside of the top 10 giants, many companies are still reasonably priced. This environment favours a strategy that seeks out smaller, cheaper, and profitable companies, where there is room for share price growth. As you can see in this chart, the top 10 companies out of 500 companies in the S&P500 index now account for 40%
The Reassurance of Strong Balance Sheets
In times of market uncertainty, companies with an ultra robust financial situation like Berkshire Hathaway offer comfort. Their strong balance sheet represents stability and security in good times and bad, and it also means they have the cash to buy when (not if) there are strong market corrections.
New Zealand: A Silver Lining
After some challenging years, New Zealand's markets gives cause for optimism, because valuations are cheap. Excellent returns can be made when conditions are not as bad as expected. You don’t need an excellent economy to profit, you just need companies to prove themselves as better than expected! It's time we shift our focus from what could go wrong to what could go right. There are genuine opportunities here for investors who can look at valuations above feelings.
A Strategy for Value and Growth
Our investment philosophy is clear:
Smart Diversified Funds – Basic diversified funds allocate based on size of companies which isn’t recommended with giant companies getting bigger. To maintain diversification we need smart trackers that allocate to companies based on more important factors such as their profitability, and valuation.
Valuation – If we invest in companies that are supported by a reasonable valuation there is less room for share price to fall. This gives us a margin of safety. If we can look after the downside risk, the upside will take care of itself.
We continue to recommend that Dimensional funds are the best vehicle to give us a smart tracker approach that has consistently outperformed the market, and we also look at companies with ultra strong balance sheets, as well as considering that there are opportunities in New Zealand companies.
Market Predictions and Rational Investing
No one can say with certainty whether 2025 will see the markets rise or fall. Many experts anticipated bad market performance for 2024, yet the year ended with surprising resilience. This just goes to show how unpredictable markets can be. What we do know is this: by investing rationally, ignoring the noise, and sticking to sound principles, we gain a significant edge over the crowd. The market always rewards those who maintain discipline, seek out value, diversify wisely and resist the temptation to time the market. We know you will be rewarded well for good investment behaviour, but we never know exactly when!
If you have any questions or wish to discuss your financial plan, please reach out. Here's to a successful year ahead.