As 2025 approaches, it becomes an opportune moment to assess our financial path in 2024 and envision where we aim to be in the coming years. This reflection not only encompasses hopes and dreams but also the crucial task of identifying mistakes to avoid, ensuring we stay on course to achieve our financial planning goals.

Navigating the Financial Landscape for a Brighter Future

The Pitfalls of Sector Rotations

In 2022, several mega cap growth stocks faced significant setbacks due to valuation concerns, inflation, and slowing growth. Take Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia, and Meta Platforms. At the end of 2022, their combined market capitalization was $6.9 trillion. However, just less than two years later, it surged to $17.6 trillion. Investors who panicked and sold out of these growth stocks missed out on a remarkable rally.Another notable example is during the 2020 downturn when oil and gas stocks were sold off. Over the last four years, the energy sector has witnessed an impressive 129% growth. Similarly, in 2023, after the banking crisis that led to the failure of some small to mid-size banks, many sold out of the financial sector. Yet, so far this year, financials have emerged as the best-performing sector, outperforming tech and many growth-focused ETFs. The key lesson here is that markets move in cycles, and quality companies with earnings growth tend to prevail in the long run.

Managing Momentum

Based on the previous point, it's important to avoid overhauling our investment strategy based solely on short-term momentum. For instance, if one is unfamiliar with cryptocurrency, buying Bitcoin just because it has surged in a short period is a bad idea. But if proper research indicates a long-term interest in Bitcoin, that's a different story.Another example is blindly piling into hot tech stocks without conducting research. However, there are valid reasons to invest in artificial intelligence themes. For example, Nvidia's ability to fend off competition and maintain ultra-high margins is highly encouraging. Similarly, enterprise software companies like Salesforce, which had been lagging, are now successfully monetizing AI and reaching new highs. The AI-driven rally is largely driven by existing earnings growth rather than potential growth. Therefore, it's crucial to take the time to research the industry and identify the companies with the most conviction and the willingness to hold through volatile periods.

Be Proactive, Not Reactive

Each year brings new expectations, challenges, and fears. It's easy to get swayed by factors that seem prominent in the moment and develop recency bias. While being aware of these factors and their impact on our investments is essential, overreacting to them can be a major mistake.For instance, the new administration will bring policy changes that will likely affect corporate taxes, trade policy, energy policy, and renewable energy tax credits. Currently, there is an abundance of media speculating about what the new administration will do, and this speculation can lead to highly volatile price movements in various assets. Making significant changes to our portfolio based on short-term guesses is not a wise decision. Instead, we should focus on the companies we have invested in and ensure they can perform well regardless of the administration in charge. In other words, do they have the resilience to endure challenges and even gain market share during an industry-wide downturn? Or could their finances be at risk? And if so, is that risk already reflected in the price and something we are willing to accept?

Mistakes Happen All the Time

Every investor makes mistakes. As we progress on our investment journey, it's likely that we will accumulate our fair share of regrets. However, by taking a deep breath and identifying potential mistakes in advance, we can prevent them from occurring.Now is the perfect time to assess our investment tendencies and address any areas where we may be prone to making errors. By doing so, we can better align our investments with our financial goals and navigate the complex world of finance with more confidence.