Financial Lessons We Learned - and What’s Ahead for 2025

30:58And that concentration of 10 stocks comprising 40 % of that index is, in some ways, it's a feature, not a bug. On the other hand, the way that you defray some of this risk is by not putting your entire year portfolio into just one single broad market index fund. You don't put your whole portfolio into the S &P 500 or into VTSAX. You offset it with some small cap exposure, with some international equities exposure. Small cap and international equities are both asset classes that in 2024 underperformed, but in the bird's eye view of history have done quite well. And so So having an allocation into both of those asset classes, that is how you defray some of the concentration risk in your broad market index.

31:53If you want to hear a really detailed breakdown of this, listen to my interview with Michael Kitsis, a very famous financial advisor. So over the summer, I flew to Chicago to the Morningstar Conference and sat down on a couch with a camera crew with Michael Kitsis for two hours, and we discussed this topic at length. You can listen to that episode at affordanything.com slash episode 525, episode 525. You can also find it on our YouTube channel, youtube.com slash affordanything. But that interview with Michael Kitsis was very much dedicated to this exact question. How do we deal with the fact that our futures, our retirement, our kids' college, our futures hinge on the performance of a really tiny number of companies, seven to 10 companies, right?

32:48The nerdy way of saying that is mega cap concentration risk. That's the jargon way of saying it. But the actual real people way of saying it is our retirements are riding on those seven to 10 companies. How worried should we be and how do we manage that risk? And the answer is some small cap exposure, some international equities exposure. The answer is good asset allocation. Speaking of asset allocation, let's talk about cryptocurrency. Cryptocurrency of all types now have in total a$4 trillion market cap, making it worth more than the London Stock Exchange. And Bitcoin specifically is up 138 % since the start of the year.

33:32That figure is as of mid-December. Now, if you're someone who does not want to directly hold crypto, but you want exposure to it through the public markets, because public markets are more regulated and have more safeguards, Well, if you've chosen that route, then you're also doing well. BlackRock's iShares Bitcoin Trust ETF is up 92 % year-to-date. And there's a particular company called MicroStrategy. This company's securities are widely considered to be a proxy for Bitcoin because MicroStrategy has heavy Bitcoin holdings. Well, MicroStrategy is up 381 % year-to-date. It also just joined the NASDAQ 100.

34:18I mentioned earlier that there is a bit of a distrust in institutions. And much of the enthusiasm around cryptocurrency broadly is a reflection of some of that. There's a lot of doubt around the Federal Reserve and around fiat currency that can so easily be printed and that can be printed at the behest of a government that has out-of-control spending. You recall that we began this episode by talking about five major factors, GDP, stock market performance, unemployment, inflation, and government deficits. On four out of those five, we're doing very, very well. But on the fifth, deficits were not.

35:00And the enthusiasm around cryptocurrency, which has existed since it was formed, but which really reached another fever pitch in 2024, is a reflection of that. Yesterday, I took a tour of a Bitcoin mining facility on the suburban outskirts of Atlanta, Georgia. I met with a guy who works in R &D at the facility, and he spent an hour giving me just a one-on-one tour. The size and the scope of the place were incredibly impressive, and the rate at which they've grown, oh my goodness, just in the last three years, their growth rate is challenging to comprehend. I'm not sure. During the tour, I was able to ask a huge number of questions around Bitcoin, such as, for example, particularly from the perspective of a company that has a lot of heavy CapEx investment, brick and mortar CapEx investment.

35:57You know, what is the impact of a halving event? And what's the impact of the rate of technological innovation as these heavy CapEx investments into facilities depreciate quickly and become obsolete quickly? And much of the manufacturing is done in China. So what impact are tariffs going to have on these Bitcoin mining facilities that are based here in the US? And given that this tour was in Georgia, what about the hurricanes? What about a severe weather event? How could those adversely impact this very capital intensive and very energy intensive mining operation? So I was able to ask them all of those questions and more.

36:38And the broad theme that I kept hearing in the answers, again, comes back to how much of the future hinges on an edge. One bad hurricane truly could be a tipping point, at least for, not for the industry as a whole, but for a specific individual company. And of course, there are things that, you know, not just crypto, but any CapEx-heavy industry in a disaster-prone area would do in order to mitigate risk. But at the end of the day, a lot of our fates are left to a storm pointing five degrees in one direction versus five degrees in another direction. And so as we take stock of what's happened in 2024, as well as look ahead, that recurring theme, that one degree of difference, that 1 % of change, that one tweak, that slight edge is often the determining factor.

37:36And so that is my analysis of 2024. for. I'd like to talk next about some scientific breakthroughs, just to shine some light of hope and optimism. We had some incredible scientific breakthroughs that I think were swept under the rug or really not just not discussed. And I want to shine a light on some of those. But before I do, on the subject of small edges, small tweaks, 1 % changes, you know, if you're a longtime listener, back in 2019 and 2020, both of those two years, we had this offering that was called One Tweak a Week. It was a series. It was this giveaway that we gave away, and it included a series of these small tweaks that you could make in your financial life.

38:25Each one fairly minor on its own, each one taking less than an hour, but a few taking just a couple of minutes. Some of those tweaks are very basic, like check your tire pressure because that's going to improve your mileage, which means that you'll be buying less gas. And some of them are quite a bit bigger, like, okay, let's take the first step in starting an estate plan. But most of them are relatively small tweaks that are designed for the accumulation of marginal gains. with the idea that if you make your life just a little bit more efficient, one step at a time, one tweak at a time, you do one thing a week, then over the span of a year, that's going to add up.

39:06And by the end of the year, you will be so much further ahead than you were on New Year's Day. So back in both 2019 and 2020, we released this free PDF, free giveaway, and we had a whole community surrounding it, the one tweak a week community. and people loved it, what we decided to do this year is revamp it and update it. And back then, four years ago, we had only 26 tweaks. So it was meant to guide you through the first six months of the year. Now we have expanded it to 52 tweaks. Friday's episode is going to be dedicated to this, but to give you a sneak peek, we cover everything from reviewing your tax withholdings, to creating an emergency medical expense plan to figuring out whether or not your side hustle is really worth your time.

39:57We talk about cleaning up your digital financial footprint, preparing for changes in your industry. You know, those are sort of big picture things. We also talk about replacing a disposable product with a reusable one, not just for the ecological benefits, but also because that's a recurring expense that you now no longer have to pay. We talk about building a price shock fund for variable necessities. So when certain prices spike, like seasonally, when the heating bill spikes, boom, you've got money in that price shock fund. So we have a giveaway guide. It's called One Tweak a Week, updated for 2025 with 52 small tweaks that can help give you little edges here and there.

40:40It's completely free. It's our gift to you for the new year, and you can download it by going to affordanything.com slash financial goals. That's affordanything.com slash financial goals. Totally free. Let's turn our attention now to some of the scientific breakthroughs of 2024. And after that, we'll talk about what's ahead for 2025. Most people are talking about AI and machine learning. Many major companies have been using AI since pre-pandemic. If you read, for example, the JPMorgan Chase Annual Letter to Shareholders. They talk about how they've actively been using predictive AI in machine learning since 2017.

41:24It was first mentioned in their 2017 Letter to Shareholders, and they've applied it to hundreds of use cases across a wide variety of domains, marketing, fraud, risk. The use of predictive AI is not new to 2024, but the unlocking of the potential of generative AI, that's where we see the story start to change. But I won't talk too much about that because everybody talks about AI. You've heard it before. I want to focus on the stories that you haven't heard. Science.org, which is published by the American Association for the Advancement of Science, named as its 2024 Breakthrough of the Year an injectable drug that protects people from HIV for up to six months.

42:09Now, currently around 1 million people per year are newly infected with HIV. But in the first large-scale efficacy trial, which took place in Africa in June, that trial reported that these shots reduced HIV infections to zero. So they reported a 100 % efficacy rate, which sounds too good to be true. But then another similar trial was conducted, and then the findings were reported three months later. That trial was conducted across four continents, and it reported a 99.9 % efficacy rate. So that shot that protects people from HIV for six months at a stretch, that was hailed as 2024's breakthrough of the year.

42:55And shockingly, at least in mainstream publications, we never heard about it. But it's cause for great optimism in the field of HIV prevention. Now there's also, switching gears, a company called Greenlight Biosciences. They've received EPA approval for the first ever RNA pesticide. This is a new approach that uses a precise RNA-based spray that targets a specific gene within the intended pest, and they're using it on the Colorado potato beetle, which is an insect that has caused half a billion dollars in global crop losses annually. Proponents think that this newer and more precise approach will be safer than current methods of pest control.

43:37And when you think about, you know, so the reason that I care about this is you think about the global crop losses, right? And then you think about what's happening in South Sudan right now. And of course, the famine there is largely due to problems related to access and distribution of food. But globally speaking, the more we can improve the efficiency of agriculture, the better of a shot we have at addressing famines that are currently happening. It is abhorrent that on the brink of 2025, there are still people, huge, huge populations of people who are facing famine and starvation. And for that reason, any efficiencies that we can make to global food production are hugely consequential.

44:26consequential. So those two stories, the HIV infection and global efficiencies and global food production, those were the two out of the three scientific stories, big breakthroughs of 2024 that I wanted to highlight. And they're both causes for great optimism. And then the third story I want to highlight is one that you probably have heard in the headline news. You probably heard about it because it's so visually compelling. And it's Starship. Starship is the world's largest and most powerful rocket. It's 120 meters tall. It's powered by 33 engines. The SpaceX Starship's lower booster rocket flew back to its launch tower instead of falling into the sea.

45:06And it was caught in this giant pair of mechanical arms. So it returned to its own launch pad and got captured by the same tower from which it had just launched seven minutes earlier. Why does that matter? I mean, And first of all, this thing was falling out of the sky faster than the speed of sound. And then from falling faster than the speed of sound, it relit some of its own engines and slowed itself down enough that it could be recaptured and then reused, right? So part of the reason that going to space is so expensive is because major parts of the rocket can't get reused. It would be like, imagine if every time you flew from New York to LA, you had to throw away the airplane at the end.

45:58Air travel would be prohibitively expensive if you could only use an airplane for one flight, and then you threw the airplane away after every flight. And SpaceX made a huge step in making space travel cheaper, specifically in getting cargo into orbit more cheaply, by making the Falcon 9 and Falcon Heavy rockets partially reusable. That single innovation cut the price of getting cargo into orbit by an order of magnitude. So this latest thing that just happened this year, 2024, that could cut the cost by another order of magnitude, which means putting people on Mars is becoming more and more realistic.

46:49It's more and more cost effective. And so future generations, I believe, will look back on 2024 as the year in which we He made a crucial innovation, a crucial step in making space travel accessible. So that's what happened in 2024. Next, let's discuss what's ahead for 2025. Specifically, there are the topics that everybody's already talking about. Tariffs, protectionism, expansionism. You've heard it before. or you can hear it on any podcast, on any news show, everyone's talking about that. We're not going to rehash that. We're going to talk about the things that no one else is talking about.

47:37Basel III Endgame and the one-two punch of the end of Chevron deference alongside the potential weakening of regulatory agencies. That's up next.

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49:09So what's ahead for 2025? One thing to watch closely is the geopolitical landscape. There are conflicts going on in Europe, in the Middle East, in Africa. There's a potential for major global conflict that involves nuclear powers. China is threatening the sovereignty of Taiwan. In fact, on the geopolitical stage, when it comes to global conflict, the story that I think in the U.S. is not getting as much attention as it deserves is China and Taiwan. When it comes to what we can expect in 2025 and beyond, that is going to be a major potential black swan event. And it's something that any investor should be watching closely.

49:54China's crackdown in Hong Kong is perhaps only the beginning. So keep a close eye on China in 2025. And also note there is this cooperation going on right now between China, Russia, Iran, North Korea. that cooperation between those nations could destabilize the West. So what would happen if we were to go into war? The value of money would likely decline. Broadly, historically speaking, there generally tends to be currency devaluation during times of war. And this is because of disrupted supply chains. It's because of increased government spending. It's because of the erosion of confidence in a nation's economy and in its currency during times of war.

50:40As long as the U.S. dollar remains the world reserve currency, we do have that going for us. But there still generally tends to be currency devaluation due to the supply chain disruption and the overall economic disruption that comes with war. And so if something were to happen, we would be facing a lot of volatility, a lot of financial instability, and we would also be facing higher inflation. How do we protect ourselves from that? And again, I'm not saying that we're going to war, but how do we manage that risk? As I mentioned earlier, anytime that you are facing inflationary pressures, tangible assets are a good store of value.

51:27Real estate holds its value, historically speaking. Real estate holds its value in times of high inflation. Real estate is a hedge against inflation, which is one of many reasons why I am so enthusiastic about real estate investing. Other tangible assets also tend to be good stores of value in inflationary periods. So you'll see other people investing in gold, in art, in anything that you can touch and hold. Now, all of that said, the other source of relative safety, particularly in times of economic disruption caused by conflict, are assets that provide an income stream. that could be rental properties, of course, that provide an income stream, but it could also be any business that you own that derives its value not from expectations of growth, but rather from the actual net operating income that it brings in.

52:28And if it's a business that brings in its revenue from something that is a staple rather than something that's discretionary, that's even better. But overall, as investors, if you're trying to protect against the downside as we look ahead to 2025, the risk that some type of global conflict might disrupt global trade and disrupt supply chains, which leads to shortages, which drives up prices, that is a risk that I think we all should be taking into account. I don't want to keep beating the real estate drum, but part of the reason that I like that particular asset class so much is because when I mentioned owning something that's a necessity rather than something that's discretionary.

53:12And no matter what's happening in the overall economy, people need a place to live. They won't necessarily buy moisturizer if things are tight. They won't necessarily buy luxury goods, but they always need a place to live. Now, that being said, the risk is that people might flee a specific geographic area. So there's a chance that a given city or town might lose population if the jobs decline and jobs go elsewhere. There's also, on the flip side, the risk of over-speculation and over-building in the area, which increases supply so much that it causes rental prices to decline. I don't see that happening in most places, with the exception of some areas of the Sun Belt.

53:53But certainly, I don't see that happening in the Midwest or in the Northeast. But it is a risk. So with real estate, the risks are localized, which is why your competitive advantage comes from deep local due diligence, deep localized knowledge, which is also one of the things that I love about it because it gives you a moat, gives you an edge because you don't have to be an expert in the national real estate market. You simply need to develop a strong expertise in a hyper local market. And that doesn't have to be a place where you live. It just needs to be a place that you know about deeply. In other words, it doesn't have to be the location you live in.

54:36It needs to be a location that you have deeply studied. All right, that's the end of my why I love real estate explainer for today. To get back to the original topic, which is what's in store for 2025, here are the things that we should be looking for. We should be looking for ongoing inflationary pressures. Not just we were just talking about that in the context of global conflict, but even outside of global conflict, what are the other inflationary pressures that we may be seeing? We should note that the Fed raised its PCE inflation forecast. Remember the personal consumption expenditure price index, which we talked about at the top of the show?

55:17The Fed raised its PCE inflation forecast to 2.5 percent in 2025. So previously, the Fed thought, back in September, the Fed thought that 2025's PCE number was going to be 2.1%. They have revised that forecast to 2.5%, meaning the Fed thinks that things are going to be more expensive next year than they had previously thought. But between September and now, the Fed revised its 2025 projections to predict that things are going to be a bit pricier. They also revised their expectation of when they think they'll hit their 2 % target. Originally, they thought that they were going to do it by 2026. They've now revised that to 2027.

56:04So watching for those ongoing inflationary pressures, that should be one of the major things that we're watching in 2025. in addition to watching China-Taiwan and watching the rest of the global world stage. We should also be watching the deficit. It's unusual to be running such high deficits at a time of economic prosperity. Historically speaking, it's unusual. And this will be a major source of conversation that I predict you will be hearing about quite a lot in the year ahead. And here's the reason, because you're probably wondering, all right, deficits are concerning, but how does that actually impact me?

56:46So here's the thing. There's a lot of collective interest right now around monthly economic data. That's how the BLS issues its reports. That's how the news reports. I mean, that's how we, the structure under which we understand inflation is by looking at monthly data because we want to see month over month trends. But there are also big macro things that impact inflation. Huge fiscal spending and the restructuring of global trade, those things impact inflation. They are inflationary, but they may not reflect in monthly data. And that might be part of the reason why there's a divergence right now between the actions of the Fed in lowering the federal funds rate versus the actions of investors who are demanding more for long-term bond yields.

57:42There are two other topics that I think we are going to hear about in 2025 that nobody is talking about yet. One is Basel III endgame. Basel III is a final set of reforms that impacts banking. It ups the capital requirements at many banks and the implementation of this final phase of, so it's called endgame because it's been rolled out in phases. And so the implementation of this final phase is supposed to start this summer, summer 2025. That would be the beginning of it. And then there would be a three-year period in which these new rules are phased in. Well, Basel III is hugely controversial.

58:32It would have an enormous impact on our banking system, the U.S. banking system. It would arguably make U.S. banking less competitive. It could tie up liquidity in a way that actually is contrary to its stated objectives and might make the system more fragile. And it's possible that it would end up ultimately raising prices for everyday consumers while forcing banks to get entangled in this big regulatory framework that results in them taking their eyes off the ball when it comes to real threats like cybersecurity. So when we talk about things in 2025 that could create inflationary pressure. I mean, if there's an increased regulatory burden that hampers banks that could ultimately have an effect on businesses that create, manufacture, and distribute everyday household products, it could impact their access to capital.

59:32It could make everyday items more expensive. It could theoretically make mortgages more expensive. Small business loans could become more expensive. So when we talk about things that would have inflationary pressures in the upcoming year, this is something to watch closely. And it's shocking that, to me, that no one outside of occasionally Bloomberg, but no one really seems to be in the mainstream media talking about Basel III. I suspect that when we get to the summer, you're going to hear about it quite a bit more. The other thing that I think will play a significant role in 2025 is the overturn of the Chevron Doctrine, which we discussed in a previous First Friday episode, coupled with this effort to weaken federal agencies.

1:00:24Those two go hand in hand with each other. Basically, we now have the judiciary, the Supreme Court, ending Chevron deference, which means they're weakening the power of regulatory agencies. And we also have that coming from the executive branch. So two out of our three branches, we have efforts to weaken the power of regulatory agencies. And as I said on a previous First Friday episode, what is one of the biggest agencies in the U.S.? It's the Social Security Administration. And so this one-two punch between the overturn of the Chevron Doctrine and between what's happening in the executive branch right now will have an impact on the Social Security Administration.

1:01:09Now, what impact? I don't know. No one knows. But will it be positive? Will it be negative? I don't know. Absolutely nobody knows. I'm sure that many people who work at the Social Security Administration would also love to know the answer to that question. To say nothing of the millions of people who receive their checks every month. But when we look ahead to 2025, what are the unanswered questions? I think one of the major, from the financial perspective, one of the major unanswered questions is how will the Social Security Administration be impacted by these forces that are taking shape around it?

1:01:50So what will be the impact? What will be the severity of the impact? What will be the pros and cons of the impact? No one knows. It's too early to say. I think the only thing that we can say with any degree of near certainty is that there will be some impact, but there is really insufficient data to draw any conclusions beyond that. So that is what's in store for 2025. Again, the major theme, if this episode has a given theme, it is the impact of the edge. History turns on slight edges, and we saw that to a huge degree in 2024. And now, remember, to give yourself a little edge, to give yourself minor tweaks here and there, Download our free guide, One Tweak a Week, Absolutely Zero Cost, by going to affordanything.com slash financial goals.

1:02:50That's affordanything.com slash financial goals. Thank you so much for being part of this community. If you enjoyed today's episode, please share it with the people in your life. And again, join us in the One Tweak a Week challenge as we head into 2025. Make small improvements to your financial life every week so that one year from now, you can look back and see that aggregation of tiny incremental gains. One step at a time, one week at a time, one tweak at a time. So affordanything.com slash financial goals. Take the one tweak a week challenge. Make sure you're following this podcast in your favorite podcast player.

1:03:32Thank you for being part of the community. My name is Paula Pant. This is the Afford Anything Podcast, and I'll meet you in the next episode. And have a happy new year.