Playing Defense and Offense With Your Financial Life

After a couple of strong years in the market, many investors are asking the same question: where do we go from here?

Global equity markets have had a strong run, and valuations are now elevated. The US market is trading at roughly 30 times earnings, while international markets trade closer to 18.

Price to earnings ratios help explain how expensive a market or company really is. A lower ratio means you are paying less for each dollar of earnings. At 30 times earnings, investors are effectively paying $30 for every $1 of profit.

Historically, the US stock market PE ratio has averaged closer to the mid teens so we are definitely in a historically high range. Higher valuations can be justified when companies are growing rapidly, since investors are willing to pay more for future earnings. Does this mean we should all run for cover because a downturn is coming? The short answer is no.

Valuations can compress one of two ways. Either the price declines causing the market to do down or companies grow into their earnings. Of course the less painful option is the latter.

Concentration Risk in the Market

Today, the seven largest companies in the US make up more than one third of the S&P 500, creating meaningful concentration risk within the index. Last year, NVIDIA overtook Apple as the largest company in the market. Now valued at roughly $3 trillion, it has been the primary beneficiary of the AI boom and represents about 7 percent of the S&P 500. Just to give you some perspective, NVDIA is now bigger than the entire value of the Russell 2000 which represents the smallest 2000 publicly traded companies!

Market leadership is constantly changing. Every decade produces dominant companies, from General Electric to Exxon Mobil, and even those with staying power like Microsoft eventually face new challenges. The common thread is that no company remains at the top forever.

A big question facing investors today is whether AI will deliver on profitability or whether the current enthusiasm is fueling a speculative bubble. Adoption is improving productivity, but it has has been more gradual than the hype suggests, and many of the companies have not yet converted that excitement into tangible profits.

Another issue is that much of the AI spending is concentrated among the same large companies, creating a form of circular buying that can inflate reported revenue without adding new sources of demand.

So should what should you do now? It is extremely difficult to identify a bubble and successfully time it correctly. It usually only becomes obvious after it has already burst. The natural follow up question is how much exposure does Impact Fiduciary have to AI if it turns out to be a bubble?

Diversification is Your Friend

At Impact Fiduciary, diversification, rebalancing and sustainable investing are central to our approach. Our portfolios do have exposure to AI, but significantly less than a traditional S&P 500 fund. While allocations vary by portfolio risk level, our equity exposure to AI is approximately 11 percent. This positioning has been a tailwind over the past year, although the strongest returns have actually come from our international holdings, particularly emerging markets.

Roughly 30 percent of our portfolios are allocated to international investments, which are far less concentrated in artificial intelligence. We also have about 40% of our domestic allocation in mid and small companies that don’t have too much direct exposure to AI but could certainly benefit from AI driven productivity increases. Of course, if a bubble were to burst, the downturn would likely extend beyond AI focused companies, though it would probably be less severe elsewhere.

Do You Play Defense or Offense?

While markets will always move through cycles, long term financial success depends far more on staying invested over the long run. So what can you actually do? This is where financial planning becomes most valuable. Instead of trying to predict what the market will do next, the focus should be on things you can actually control such as how much you are spending and savings each month.

It’s not just the markets, everything feels expensive today. We hear from many clients who want to understand where their money goes each month and how to save more.

So not to be too obvious, but saving ultimately comes down to two factors: earning more or spending less. Playing offense means focusing on income growth, while playing defense means paying closer attention to expenses.

Just like any successful sports team, a winning approach usually has strong elements of both defense and offense.

One of the most important parts of financial planning is understanding your monthly spending.

What if I told you that you could save a thousand dollars or more by taking one hour of time today to review your spending? You can do this by using a budgeting tool that aggregates your accounts and tracks expenses automatically. Popular options include Rocket Money, Monarch, and Simplifi.

I’ve recently been using Rocket Money and appreciate the emphasis on identifying and canceling recurring subscriptions, which alone can save thousands of dollars each year, especially from those sneaky annual subscriptions that quietly auto renew.

The real value of these tools is the clarity they provide. By linking your bank and credit card accounts, you can see your spending month by month and quickly identify your typical monthly expenses.

A good question to ask yourself when evaluating your spending, is it worthwhile? It makes sense to review your expenses to identify what truly adds joy to your life. There’s no need to cut out the daily latte if it’s something you genuinely enjoy, but maybe cancel the gym membership or streaming service that you “might” use in the future.

And it is not just the small decisions that matter. Large, impulsive purchases often have the most lasting impact. Choices like private school tuition or buying more house than necessary can be an underappreciated reason people end up working decades longer than planned.

What is Your Number?

Understanding your monthly spending is critical to determining when financial independence becomes possible. In Los Angeles, a family of four’s non housing living expenses often average around $7,000 to $8,000 per month, with rent or a mortgage adding several thousand more. When everything is added up, many households find their total monthly spending falls in the $9,000 to $11,000 range.

At Impact Fiduciary, we use complex financial planning software that takes into account all of your assets, taxes, inflation and spending goals to determine your likelihood of success.

Feeling stuck or not sure what to do next? We are here for you. One of the most rewarding aspects of being a financial advisor is seeing the progress our clients make in a short time working together.

As the new year begins, it’s a great time to take a step back and get intentional about your financial life. The choices you make today will compound and hopefully provide freedom and optionality down the road. Your future self will hug you for it!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.