A new year is a natural time to examine one’s investments, and the stock market’s unusually generous returns of the past few years have padded many a 401(k). But in some portfolios they have also increased risk and reduced diversification. Investors can correct for these problems with a few simple steps and thus avoid costly errors.

All investors should ensure that their portfolio matches their risk tolerance. Suppose that you previously decided your portfolio would include 60% equities and 40% bonds. Examining your current holdings, you might find that ebullient stock markets last year expanded your share of equities to 70%. Reducing your stock holdings will return your portfolio to your desired equity-to-bond ratio. Annually rebalancing portfolios reduces risk, and during volatile periods such as the first decade of the 2000s, the strategy increases returns. No one can buy low and sell high perfectly. But systematic rebalancing is the closest analogue we have.

Moving into bonds is particularly advantageous. Yields for long-term Treasury bonds are now more attractive than in the 2010s, while equity valuations are unusually stretched. AA-quality 20-year municipal bonds have a taxable-equivalent yield of roughly 6.5% and are likely to be competitive with long-term equity returns. U.S. 30-year Treasury Inflation-Protected Securities provide a base real yield of 2.6%. If the inflation rate continues at 3% a year, a tax-exempt investor would earn approximately5.6%.

Investing in index funds is another inexpensive, reliable way to generate returns.Competition has pushed annual expense ratios for broad-based low-cost index funds close to zero. Pundits often encourage stock picking, but on average the S&P 500 beats roughly two-thirds of large-cap fund managers each year. Over a 20-year period, less than 10% of those funds outperform the S&P index. International stocks can provide helpful diversification to those index funds, taking advantage of more attractive valuations than domestic equities.

Wise investing also means avoiding mistakes. Rebalancing is different from trying to time the market. Buying when markets are optimistic and selling during widespread pessimism is a sure way to lose the returns generated by staying in the stock market over the long term.

Investors should also resist the temptation to add “alternative” private investments to their portfolios. These investments have produced very generous returns for institutional investors, who were first to use them. But outsize returns are unlikely tocontinue, and such investments have recently been selling for less than their net asset value. Even if they do produce acceptable future returns, extraordinarily high investment fees for small investors will reduce net gains.

Investors also should avoid exposure to new markets that offer little public benefit beyond entertainment. The global, multi trillion-dollar cryptocurrency market has attracted speculators. The crypto market often facilitates illegal activity by allowing anonymous transactions, which bypass the regulated financial system and are nearly impossible for law enforcement to police.

During certain periods, momentum traders have benefited greatly from spikes inBitcoin and other crypto assets. But there are also momentum crashes. In November2025, Bitcoin fell from over $110,000 to less than $85,000, wiping out many leveragedspeculators.

Crypto isn’t the only risky new market. Sports betting has exploded, and predictionmarkets are seeing record activity, with weekly volume estimated at more than $2billion.

An unappreciated fact about these new casino markets is what terrible investments they are. The odds are heavily stacked against participants. Take the simplest sports betting contract: picking which of two teams will win a game. If the teams are evenly matched, with each team having a 50% chance of winning, the odds will be listed as-110 for each team. A $1,100 bet on the winning team would earn $1,000. But if you bet on the losing team, you lose $1,100. So if you are correct half the time, you will be a consistent loser. The implicit odds of winning can be even worse on prediction market bets.

Some of the most successful new financial-services companies, such as Robinhood, now offer brokerage services not only on stocks and bonds but also on a variety of alternative investments. Their mission is to “democratize finance” and give investors greater control over their portfolios. But investors won’t be well-served by adding either crypto or prediction-market positions to a diversified portfolio of stocks, bonds and cash reserves. At most, these should be considered speculative side bets, not core investment holdings.

But if investors rely on smart, time-tested risk management, their portfolios will thrive in the coming year.