3 Things Every Investor Must Do By Year End

Doom or boom you’ll be ready.

I hope everyone in our Dividends Community had a Happy Thanksgiving! The past week has been busy in addition to the holiday, with a new issue of Dividends Premium REITs posting and the launch of our Dividends Roundtable on the Discord platform.

Also on Discord, we held our first of many meetings of the Founders Circle (still a few memberships left). To find out more about Dividends Premium, check out the upgrade options highlighted in this email, as well as in the Substack app. Thanks for reading!—RC

Will the US economy avoid a hard landing? Has inflation really been tamed, or is it ready to flare up again? Will the Federal Reserve continue its pivot to lower interest rates? And how hard will the incoming Trump administration push its campaign promises?

Investors have reason to ask all those questions heading into 2025—especially with nearly one-third of the S&P 500 weighted to just 6 Big Tech stocks, all currently priced to perfection.

Personally, I’m finding a few too many similarities to 2000-01 to be wholly comfortable.

Then as now, there was a shift in the balance of power in Washington. And the incoming Bush administration promised (and delivered) far different policies from the outgoing Clinton administration, and defeated presidential candidate Al Gore.

Those included energy, with Republicans favoring oil and gas over then fledging wind and solar. And then as now, the Fed was pivoting to lower interest rates, heading off what proved to be one of the mildest recessions on record.

What I’m most disturbed about, however, is the S&P 500’s historically heavy weighting in Big Tech. Remember that the Nasdaq actually doubled in 1999 on information technology hype.

But if anything market concentration is a far greater risk now to Americans’ stock portfolios than it was in the early ‘00s. That’s because more than half the money in the stock market now is passively invested rather than actively managed. And that means it’s in the same ETFs—exchange traded funds—that mirror S&P 500 performance.

Looking into 2025, there are certainly positives—Likely tax cuts and reduced regulation, falling inflation and interest rates, reduced risk of an imminent recession. But there’s considerable uncertainty also. And a number of people I’ve talked to are actually considering going to cash heading into the New Year.

That would be a mistake in my view.

As Dividends Premium members know, I’m holding about 20 percent of our Model Income Portfolio be in cash. Specifically, that’s the Vanguard Federal Money Market Fund (VMFXX), which pays around 5 percent annualized and carries no meaningful risk.

That’s a much more than the 5 percent or so I typically carry. But if a Big Tech correction takes down the US market, it will protect portfolio value and provide a ready source of funds to buy stocks cheap.

Cash should never be considered a long-term investment. Only stocks reliably build wealth over time. And with so much money crammed into a handful of Big Tech names, many top quality stocks are actually quite cheap now.

This is no time to be complacent. But equally, we can’t afford to be out of the stock market.

Fortunately, there’s no paradox—provided you do three things now:

First, take the opportunity this holiday season to give your stock portfolio a full going over. And before you do, resolve to sell any company you own that’s showing real signs of weakening as an underlying business.

That doesn’t necessarily mean selling stocks that have underperformed or worse lost money. Near-term, the market is a popularity contest where leaders and laggards frequently change places. But the long-term is what matters to building wealth. And in the long run, stocks of companies that build value go up. Those paying dividends increase them.

So how do you identify a true weak link? One unmistakable sign of trouble is “sliding guidance” over a couple quarters for financial metrics like earnings per share and EBITDA—a measure of cash flow that adds back in interest, taxes and non-cash expenses depreciation and amortization to earnings.

I wouldn’t get too caught up in any specific numbers of acronyms. The point is the company has been unable to deliver on what it’s promised. Management failed to accurately gauge the headwinds affecting its business. Maybe there was a good reason for that. But I don’t care. Things are headed in the wrong direction and the company is unable to correct course. We want out.

Q3 earnings results and guidance updates have given us an ideal opportunity to assess weakness. It’s up to us to heed the signals.

My second end-year suggestion is to take profits on any stock where a sudden 20 percent decline would have an outsized negative impact on your overall portfolio value.

That’s going to vary from person to person. But when it comes to stocks, the most likely candidates are stocks of companies associated with the artificial intelligence boom. Those for sure include the Big 6 Tech stocks: Alphabet, Apple, Amazon, Meta, MicroSoft and NVIDIA. But they also include sectors that may not come readily to mind: Nuclear power/uranium stocks and data center REITs being two.

I’m not saying to sell the whole thing. Just bank some gains and hold them in cash for now.

My third suggestion is to make all your planned tax loss sales now, rather than wait to the end of the year.

Sales from an IRA don’t generate tax losses. So if that’s where you hold all your stocks, you can stop reading.

If you’re planning to sell from a taxable account, ask the following: Will the loss offset a gain? And am I planning to buy back in after 30 days to avoid the “wash rule” necessary to claim the loss?

If there’s no gain to offset and you still want to own the company, there’s no point in selling. But let’s say there is and your plan is to buy back.

Your main risk is basically opportunity: The stock may rally meaningfully before you get back in.

January has historically been a time where the previous year’s laggards attract buying power. Many stocks won’t. But by selling now rather than at the end of the year, you’ll reduce that risk by being able to buy earlier in the month.