How to invest $1 million in 2025

The past few years have been kind to investors. A glance over 2024 asset class returns suggests that most Australian investors have been sitting on healthy gains for the past 12 months, with the much-loved banks leading the charge. Global equity exposure will have sweetened returns, with the S&P 500 clocking up consecutive years of +20%. Even conservative investors have been rewarded with returns on cash, which is the best we've seen in decades.

It's in our nature to resist making changes to a winning formula. However, with market leadership being highly concentrated and, for the most part, coming from high-growth stocks, there's a decent chance that your portfolio has developed a few biases and overweight positions.

Why does this matter? Markets have repeatedly reminded us that good times don't last. Reviewing your portfolio and making tweaks or rebalances is prudent. This ensures you harvest some of those gains and position your portfolio for all market conditions.

Professional capital allocators keep an eye on the macro picture. However, their asset allocation framework is the foundation of how and where they invest capital. This discipline allows them to identify where excessive risks may lie within portfolios and helps remove emotions from investment decision-making.

I recently spoke with Charlie Viola from Viola Private Wealth and Ben Clark from TMS Private Wealth to explore the factors they think matter for 2025, discuss how they are allocating capital for the year ahead, and to get some professional tips on rebalancing your portfolio.

Putting theory into practice, I also revealed my SMSF portfolio and asked my two guests to share the changes they would make. Needless to say, I’ve developed a few biases that need ironing out.

The big picture for 2025

Before we discuss how our guests are allocating for 2025, it's important to understand the factors underlying their views. I asked Viola and Clark to share the top three factors shaping their opinions on where opportunities lie in 2025.

#1 Valuations

After a few good years, it's unsurprising that an element of caution is creeping in around equity valuations. For Viola, this means two things. First, he wants to trim or take profits from some big winners that have generated returns and become bigger portfolio positions. In addition, higher valuations mean that he is being more cautious when allocating new money into equities and with a focus on quality.

Clark has a similar view, especially when it comes to investing in the ASX. The chart below shows the ASX's earnings yield, now below 4%, an anomaly over the long term. Clark does see pockets of value and highlights miners as an unloved sector on the Australian market, where sentiment is poor. A rally could easily be fuelled by a rotation out of bank shares, which trade on record valuations despite low to no earnings growth.

He has a different view on global equities and is happy to let global exposure run. US blue chips undertook an aggressive cost-cutting process during COVID, yet their revenues continued to grow.

The result is that US stock earnings have been far superior to those of Australian blue chips, where there's little growth - a trend he says could continue for the next decade.

#2 Inflation and rates

Inflation has influenced markets and investors in the post-COVID era, and we're still not out of the woods. Expectations remain that inflation will return to long-run averages and that rates will follow the same trajectory. These expectations have no doubt contributed to the bullish sentiment in equities. Viola sees this as a risk, and we've seen evidence in late 2024 of how markets will react to any suggestion that the lower path could be delayed or not come to fruition.

Trump's pro-business stance is a threat, particularly in the US, where interest rate expectations are being dialled back. This view underpins his desire to take some profits and keep his defensive allocation in floating-rate assets over longer-duration assets, like government bonds.

Clark has a slightly different take and is willing to allocate a portion of his defensive allocation away from the floating rate and start locking in some longer-duration exposures. This is not an all-in bet, but his view is that Australia is about to embark on a rate-cutting cycle. If this plays out, long-duration bonds can deliver income and capital growth.

#3 Private markets

Whilst valuations in public markets have moved quickly, private markets have not kept pace. This is partly due to the asset class' less liquid nature but also reflects some of the challenges, such as the lack of IPO activity allowing private equity firms to create exits.

In recent years, the breadth and depth of private markets have become more apparent to investors, and the ability for investors like you and me to invest in this space is improving. Viola and Clark agree that allocating to private markets is a sensible way to redeploy capital harvested from public markets to provide diversification while setting your portfolio up for the next decade.

4 rebalancing tips

Viola and Clark shared the following tips if you're keen to undertake some rebalancing but unsure where to start.

• Don't be afraid to trim winning positions: An asset allocation framework will help you identify where your portfolio has become overweight or underweight. There's nothing wrong with taking some profits.
• Make incremental changes: Avoid making all-in or all-out bets. Markets constantly wrong-foot you, so making incremental changes is better than making big moves in and out of the market.
• Diversification: Take advantage of asset classes that provide genuine diversification. Alternatives such as private equity and private credit can cushion the volatility of public markets.
• Liquidity: There will be darker days at some point. You don't want to be forced to sell distressed assets, so having an eye for where liquidity will come from when markets turn will allow you to capitalise on that opportunity.

"We all know there'll be a dark day at some point again. There'll be times, as Warren Buffett said, when it is raining gold and you just need to walk outside with a bucket." Ben Clark, TMS Private Wealth

How to invest $1 million for 2025

The tables below indicate how Viola and Clark are allocating for 2025. While these are not tailored to an individual's specific needs, they reflect the positioning these two advisers are taking with their clients in the year ahead.

Key points

• Weights suited to a more defensive-oriented investor.
• Reducing ASX exposure, prefers global equities.
• Avoiding duration in fixed income.
• Actively allocating to growth and defensive alternatives.
• Happy to hold some cash to deploy as opportunities arise.

Key points

• Weights suited to a more growth-oriented investor.
• Lowest exposure to ASX in a decade.
• Happy to run with global equities.
• Actively allocating to growth alternatives.
• Starting to add duration through government bonds.

My SMSF revealed and reviewed

Asset allocation can be a tricky topic to write about. Let's face it, getting rich fast from picking a 10-bagger is far more enticing than being told to be patient and let compounding do the work.

To put some of the theory into practice, I shared my SMSF holdings and weights with my expert guests and asked them, somewhat hesitantly, to expose my sins.

I'm 44, so hopefully, I have a decent runway to withstand a few bumps. Given my job, I have developed an understanding of markets and am comfortable with some volatility.

That being said - both Viola and Clark pointed out what I knew deep down - the portfolio is way too concentrated and in highly correlated funds. It's been a great few years, but I'd be a fool to believe that this current allocation will hold up when markets get jittery.

I use a combination of active and passive funds alongside some very select exposures to larger-cap ASX-listed companies. The fund managers are all firms that I have been able to follow and learn about for over a decade.

The suggestion from both advisers was to dial back the concentration, trim some of the exposure in Australian equities and look to add some diversification to assets, such as private equity, that will cushion volatility. It makes sense, and fortunately, I've got an opportunity to make some changes.

All the best for 2025

One thing I’ve learned over the past decade at Livewire is that there are many ways to invest. The goal of this article is to give you some insight into how professional allocators think about building portfolios to grow wealth over long periods of time. 

Many of you will have developed your own approach to investing that works for you but we can always find ways to learn and improve. 

All the best for 2025, let’s hope it is another good year for markets.