As 2024 concludes and we embark on a new year, it is an opportune time to conduct a comprehensive review of the past years' investement performance. This anaylsis will not only provide valuable insightes into the efficacy of my previous strategies but also lay the groundwork for a robust investment approach for 2025. In this post, I will delve into key market trends, assess portfolio returns, and identify areas for optimization in the year ahead.
2024 Investement Performance Review
To begin, let's examine the overall portfolio retruns for the year.
2024 proved to be a remarkably strong year for equity markets, with both the S&P500 and NASDAQ 100 delivering substantial returns. It's likely that the majority of investors with U.S. equity exposure enjoyed significant gains. Personally, my portfolio performance was respectable, though it essentially tracked the broader market. I achieved a total return of 25.94% for the year, slightly outperforming the S&P500 but falling short of the impressive gains seen in the NASDAQ100.
Now, let's take a broader view and examine my cumulative portfolio performance since 2020. My primary investment objective is to consistently outperform the market. I'm pleased to report that as of the end of 2024, I've mananged to surpass both the S&P500 and the NASDAQ 100 on a cumulative basis.
When we look at annualized returns, the NASDAQ 100 takes the crown ith an average yearly gain of 19.2% over the past five years, making it the top performer among major market indices. And guess what? My personal portfolio clocks in with an even more impressive annualized return of 27.69%!
Here's breakdown of my portfolio as it stoood at the end of 2024. I'm currently holding about 21% cash and around 9% in a mix of short-term and long-term bond ETFs. This means roughly 70% of m portfolio is allocated to equities. Palantir and Tesla represent my largest holdings, which isn't surprising given their stellar performance last year. Their strong gains naturally pushed them to the top of the portfolio.
Looking back at my investment journey last year, I made four major moves. My long-term bets on Palantir, Tesla, and Amazon, driven by their immense growth potential, proved to be incredibly successful.
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| Source: SeekingAlpha |
All three stocks crushed both the S&P500 and NASDAQ100 in 2024. However, I also had one painful misstep - my third-quater foray into M&A arbitrage with Capri Holdings. The FTC's unexpected victory in that case resulted in a significant loss (nealry 50%!) on that position, which I've since exited. In hindsight, avoiding that trade would have undoubtedly boosted my overall perfomance for the year, and I can't help but feel a tinge of regret.
Plan for 2025
Heading into 2025, I'm grappling with a lot of uncertainty in the stock market. Remember the bear market we experienced in 2022 following the Fed's interest rate hikes and quantitative tightenting? Well, after the massive rallies of 2023 and 2024, stock valuations are looking pretty lofty. This leaves me pondering a crucial question: how do we position our portfolios for the year ahead?
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Source: SeekingAlpha
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We've just experienced a truly epic two-year bull market, with the S&P500 surging 53.8% and the NASDAQ skyrocketing a mind-blowing 93.44%! After such a massive rally, I can't help but feel a bit cautious heading into 2025. Risk management is definitely top of mind.
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| Source: Macrotrends.net |
If the market continues to roar higher in 2025, we could be looking at a historic bull run rivaling the late 1990s. Remember what happened then? The S&P 500 nearly tripled in about five years before the dot-com bubble burst in 2000.
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Source: Yadeni Research
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Looking S&P 500's forward P/E ratio, we're currently sitting at 21.6x as of December 2024. That's getting uncomfortably close to the dot-com bubble peak of aruond 25x. However, there's a key difference this time around.
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Source: Yadeni Research
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Back in the dot-com era, the IT sector was driven by pure speculation, with companies sporting astronomical valuations and a sector average P/E ratio exceeding 45x. Today, the IT sector P/E ratio is around 30x, which seems more reasonable given the actual earnings growth we're seeing. If companies can continue to deliver strong earnings, current valuations might still be justified.
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| Source: SeekingAlpha |
Microsoft just dropped a bombshell last Friday, announcing a whopping $80 billion investment in data centers for fiscal year 2025. This signals loud and clear that Big Tech still sees a massive opportunity in AI. Just look at the numbers: in Q3 2024 alone, the big three cloud providers (Microsoft, Amazon, and Google) raked in a combined $62.9 billion in cloud revenue, a 22.2% jump year-over-year! AI companies that can't build their own computing power rely on these cloud services, and with demand exploding, you can bet that Amazon, Google, and Microsoft will keep pouring money into this space. Of course, they're also hungry to develop their own AI capabilities. And let's not forget about the other mega-cap players like Meta and Tesla who are also going all-in on AI.
Now, some fols are waving red flags about AI profitability (or lack thereof). They argue that just like in the dot-com bubble, if these investment don't translate into earnings soon, current stock prices are out of whack. But here's the key difference: back then, the underlying technology and infrastructure were practically non-existent. Today, it's a whole new ball game. If AI can prove its worth, the foundation is there for it to flourish. Plus, even though "AI revenue" might not be a line item on balance sheets yet, companies are already reaping the benefits of AI through cost savings and productivity gains. Google claims that 25% of its code is already written by AI! And Meta says AI has boosted their ad revenue and slashed expenses.
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| Source: Mckinsey & Company |
A recent McKinsey survey from May 2024 revealed a staggering surge in generative AI adoption. A whopping 65% of surveyed companies are now using it, doubling the adoption rate in just 10 months! Businesess are finding real value in this technology, particularly in HR, where they're seeing significant cost reductions. Meanwhile, supply chain management is experiencing the biggest revenue boost thanks to generative AI. And it doesn't stop there - the survey shows that companies are finding ways to cut costs and drive revenue across various functions.
This tells that barring any major economic chocks, AI investment is going to remain red-hot. As long as the market narritive around AI stays strong, we can expect this momentum to continue. Of course, it all comes down to earnings growth in the end. That said, I'm still bullish on Amazon, Tesla, and Palantir. I expect them to deliver solid performance again this year, so I'm not planning to trim my positions..unless, of course, we get hit with some unforeseen external shock.
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Source: FRED
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Those of you investe in U.S. equities likely remember the 2022 bear market. It was a tough time, with rising interest rates and the Fed's quantitative tightening (QT) pushing the market down. But here's interesting thing: even with QT continuing and high rates persisting, the S&P500 bounced back. Many experts attribute this to the reverse repo facility, which prevented liquidity from being fully drained from the market despite QT.
However, as you can see from the chart above, that reverse repo balance is dwindling. If it dries up and the Fed keeps tightening, we could see liquidity evaporate and trigger a sell-off in risk assets. I'm sure the Fed and Treasury are keeping a close eye on this, but it's potential risk factor for the first half of 2025. We also have to consider other wildcards like falling U.S. interest rates, the Bank of Japan raising rates, and a potential unwinding of the yen carry trade that could cause some market turbulence. This is exactly why I always keep a portion of my portfolio in cash.
Overall, I believe AI stocks will maintain their momentum in 2025. But we can't ignore the fact that valuations are elevated. Add to that the potential for protectionist trade policies under a new administration, the U.S. government's massive debt, and a whole host of other macro risks, and it's clear that 2025 will be a more challenging environment that the past two years. My strategy? Focus on identifying companies poised to outperform and maintain a health cash position.
As always, remember that all investment decisions come with inherent risks. Do you won research and invest responsibly.
Thanks for reading!
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