Where you should invest your money (and the pitfalls to avoid) to set yourself up for a prosperous 2025, by the Mail’s wealth guru JEFF PRESTRIDGE

New Year is not just about celebrating the start of another year. It’s also a time for reflection, new resolutions and resolve, especially when it comes to financial matters.

For many, the following weeks will involve filing a tax return and paying a tax bill before the month is out (my priority).

Others will look to put their household finances in good order – and for investors, January is a great time to run the rule over your investments to see whether they remain fit for purpose or need adjusting at the edges. Both are on my ‘to do’ list.

In the past few days (Christmas Day excepted), I’ve spent a lot of time speaking to experts about what the year ahead offers in terms of investor returns.

Although no one can look into the future with 100 per cent certainty, these people speak almost as one. Words such as ‘caution’ and ‘diversification’ pepper their thoughts. They believe investors need to tread carefully and not be wedded to the themes that have enriched their portfolios over the past five years.

David Coombs, head of multi-asset investments at Rathbone Asset Management, admits his investment team are struggling to come up with ideas that are likely to generate positive returns in the year ahead.

‘There are pitfalls everywhere,’ he says. ‘Everything we like, such as the investment themes around the growth of artificial intelligence and healthcare, are looking expensive. There are lots of areas that have underperformed, but that doesn’t mean their moment in the sun is about to come.

‘Now is a good time to step back, have a reset and ask yourself: ‘Is my portfolio still fit for purpose – or does it need a refresh?’ ‘

Cautionary words, echoed by many. So how do we as investors approach 2025 – and where are there opportunities?

THE UNITED STATES: MAGNIFICENT OR A BUBBLE?

MOST investors will have exposure to the United States – and rightly so. It’s the engine of the global economy (though the Chinese may beg to differ) and in the ‘magnificent seven’ possesses some of the world’s leading-edge companies, especially in artificial intelligence.

If you have global or US investment funds in your portfolio, I would put money on the fact that you have a good smattering of exposure to these tech giants – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

Indeed, more than you probably think. For example, some innocuous sounding global funds have big chunks of their portfolio in the magnificent seven.

These seven companies dominate the US stock market and have been responsible for much of its stellar performance in recent years. For example, for the year to date, shares in Nvidia are up more than 190 per cent, Meta 75 per cent and Tesla 86 per cent.

Susannah Streeter, head of money and markets at investing platform Hargreaves Lansdown, says these tech giants will remain an ‘exciting’ part of the US stock market in 2025. But she cautions it is going to be a ‘bumpy road’.

‘AI is a developing technology and the scale of future demand is hard to forecast,’ she says. ‘The huge sums needed to be ploughed in to keep up with the tech pack are eye-watering and companies will need to show benefits are coming thick and fast to account for splashing so much cash.’

Brian Dennehy, managing director of Dennehy Wealth, is more cautionary. He says US stocks – and in particular the share prices of the magnificent seven – are overvalued and ‘dangerous’.

He says investors fall into two broad categories: ‘accidental punters’ who do not want to miss out on the latest investment fad (AI and the magnificent seven), and ‘evidence-based investors’ who understand that bubble stock markets are typically followed by sharp price falls, so buy shares that look relatively cheap rather than participating in the latest craze. 

‘The US stock market and magnificent seven are exciting places to be for investors,’ he adds. ‘But they are bubbles which as history has shown [the dotcom bubble of the late 1990s] invariably burst.’ Rathbone’s Coombs says trimming exposure to big tech stocks is a prudent approach – monthly fact sheets produced by all funds will help you identify whether the magnificent seven dominate the top 10 holdings and whether IT is a fund’s biggest sector exposure.

For investors who like the AI theme and are happy to hold individual shares, Coombs says other stocks are worth considering, including the likes of ASML (Netherlands), Broadcom and Cadence (both US) and TSM (Taiwan).

This diversification away from the magnificent seven is the approach of £1.2 billion investment fund Blue Whale Growth over the past year (see page 58). Twelve months ago, this global fund had just over a fifth of its assets in three of these stocks (Nvidia, Microsoft and Meta). Today, exposure is down to 12.5 per cent, with Nvidia the largest slice at 8 per cent.

Echoing Coombs’s approach, Blue Whale manager Stephen Yiu prefers other tech stocks, with Broadcom being the fund’s largest holding at 9.5 per cent.

US INVESTMENTS WORTH CONSIDERING

ALL the experts I spoke to believe the best way to de-risk your portfolio from overdependency on the big US stocks is to buy US funds where their presence is limited. Such a market diversifier is Premier Miton US Opportunities, a £1.7 billion fund. 

Darius McDermott, managing director of Chelsea Financial Services, says the fund has no holdings in the magnificent seven, but has still delivered steady investment returns over the one-year periods to December 24, 2024 and 2023 of 14 and 12 per cent respectively.

Alex Watts, fund analyst at investing platform Interactive Investor, says another way to reduce exposure to frothy magnificent seven stocks is through exchange traded fund Invesco S&P 500 Equal Weight. This provides equal exposure to all 500 companies that make up the Standard & Poor’s 500 Index – the US’s largest listed companies.

Watts adds: ‘It offers a better diversified approach to investing in the US which could [or might not] lead to higher returns.’

Over the past year, it has made gains of 13 per cent. Fund management charges are low at 0.2 per cent.

Jason Hollands, a director of investing platform Bestinvest, says Federated Hermes US SMID Equity is a great diversifier because of its exposure to small and medium sized US stocks.

Valuations in these areas of the US stock market, says Hollands, are not as pricey – and being dominated by domestically-focused companies, they could benefit from the incoming president’s determination to make the United States great again by putting US business first.

Over the past two one-year investment periods to December 24, the Federated fund has delivered returns of 16 per cent (2024) and 14 per cent (2023). The ongoing annual charge is reasonable at 0.75 per cent.

Hargreaves Lansdown includes Artemis US Smaller Companies among its ‘five funds to watch in 2025’. Like Bestinvest’s Hollands, it believes that domestic-facing US companies should prosper under a Trump administration.

For share seekers, Rathbone’s Coombs likes consumer staples giants Colgate-Palmolive and Procter & Gamble. ‘They provide stability in a portfolio,’ he says.

For dividend lovers, Colgate has 62 years of annual dividend growth under its belt while Procter & Gamble has 68.

UK: DAMAGED BUT STILL OPPORTUNITIES

The backdrop to the UK stock market is hardly one to fill investors with heaps of New Year cheer. For that we must ‘thank’ the Chancellor, as a heap of tax-raising measures will do great damage to UK businesses – both large and small – over the coming months.

As if that wasn’t bad enough, the economy is going nowhere and inflation remains as annoyingly persistent as a winter cold – and that could extend into spring and summer colds.

Views on the UK stock market vary far more than they do on the United States. At the ‘negative’ end sits Coombs. He believes that the backdrop to the equity market ‘looks dreadful’ – and as a result, he is ‘struggling to find good investment ideas in the UK’.

Among the few UK stocks he likes is pharmaceutical giant AstraZeneca, which he describes as ‘good value’.

Hollands is more optimistic. He says: ‘We are neutral on UK equities, given the damage done to the domestic economy by the Chancellor’s tax-hiking Budget.’

But he adds: ‘Yet, UK shares remain incredibly cheap, especially when compared with valuations across the pond. This will fuel continued bids for UK companies, and listed companies buying back their shares in order to reduce their supply and hopefully drive up their prices.’

Interactive Investor’s Watts agrees. He says the valuations of most UK stocks remain relatively low, and therefore make ‘less daunting entry points’ for investors compared to other markets such as the United States.

He also likes the fact that the UK is a perfect diversifier away from the tech-intensive American market because of its ‘heavy exposure to finance, energy and mining stocks’.

A final plus for the UK stock market is its rich source of dividend income – ‘an important component of total returns for investors’, says Watts.

According to data compiled by investing platform AJ Bell, dividends paid by the UK’s biggest 100 listed companies are expected to increase next year on average by a healthy 6.5 per cent.

UK INVESTMENTS FIT FOR YOUR PORTFOLIO

IT’S no surprise that Watts opts for an income-orientated investment fund – Artemis Income – as a way of extracting returns from the UK stock market next year.

He says: ‘It invests in stable, well established businesses with the financial strength to pay solid dividends to shareholders. It offers an annual dividend in the region of 4 per cent and has an ongoing charge of 0.8 per cent. I see it as a solid, core UK equity income option for investors.’

The fund’s biggest holdings are all familiar names – the likes of Aviva, Lloyds, Next and Tesco. Watts’s other preferred UK investment fund is stock market-listed Fidelity Special Values, which seeks out undervalued companies.

Another fund to adopt such an ‘undervalued’ approach is investment trust Temple Bar, a favourite of Bestinvest’s Hollands.

This £880 million fund has energy and mining companies (rich sources of dividend income for investors) among its top holdings – the likes of Anglo American, BP, Shell and the French-based TotalEnergies.

The annual dividend on offer is just under 3.6 per cent and the ongoing charges are reasonable at 0.56 per cent. Over the past year, its shares have risen by more

than 12 per cent. Other British fund picks among our experts include JO Hambro Capital Management UK Equity Income, Tellworth UK Smaller Companies and JPM UK Equity Core.

OTHER MARKETS AND ASSETS

ALTHOUGH experts point to pockets of investment opportunity in Asia and Japan (funds Guinness Asian Equity Income, Pictet Japanese Equity Selection and UTI India Dynamic Equity are all mentioned in dispatches), they are eclipsed by a far stronger theme: that of asset diversification.

In other words, building robust defences into your portfolio that will provide ballast if stock markets go into a tailspin. And that means exposure to gold and to government debt (UK gilts).

Analysts at Goldman Sachs say the gold price could rise to $3,150 (£2,516) per ounce by this time next year, compared to the current $2,624 (£2,096) – that’s a rise of some 20 per cent.

‘Gold continues to attract buyers, particularly central banks,’ says Dennehy. ‘Many investors haven’t yet jumped on board, which means we are still in an uptrend. So I’m a buyer.’

Investors can get exposure by buying a fund which tracks the gold price. Leading options include iShares Physical Gold and Invesco Physical Gold.

An alternative approach is to buy a fund which invests in the shares of gold mining companies. For example, Dennehy likes Ninety One Global Gold, which invests in 25 gold miners – its biggest holdings are in Canadian firms Barrick Gold and Agnico Eagle.

‘Shares in gold mining companies are cheap relative to the gold price,’ he says. ‘So, as an investor, you’re taking noticeably more risk for considerably more potential. Not everybody’s cup of tea, but it might suit some.’

Defensive orientated investment funds such as Troy Trojan, whose aim is to preserve investors’ capital, have more than 10 per cent of their assets in gold-price related funds.

Coombs says his big defensive play is UK gilts, which offer investors the chance to lock into attractive income ahead of interest rate cuts in the coming year.

It’s a view shared by Hollands. He says: ‘Current 10-year UK gilt yields provide investors with the chance to lock into returns of around 4.5 per cent per annum. A predictable return in a world where unpredictability currently reigns supreme.’

A fund such as iShares Core UK Gilts provides a route into this robust asset class. Plenty of investment ideas for 2025. I hope some of them work for you.