This image shows year-to-date 2025 returns as of 12/31/2025. U.S. large-cap stocks are up 17.88%. U.S. small cap stocks are up 12.81%. International developed stocks are up 31.89%. Emerging markets stocks are up 34.36%. U.S. short-term bonds are up 5.35%. U.S. aggregate bonds are up 7.30%. U.S. municipal bonds are up 4.25%. Global bonds are up 8.17%
‘Tis the season of unkept promises. Eating healthier? Unlikely. Working out more? Even more unlikely. The past year saw false proclamations that were plentiful — and financially painful for those who listened.
All major asset classes ended 2025 at or near all-time highs. Investors continued to be rewarded more for being an owner versus being a lender, a fact that’s volatile year by year but inevitable over the long term. After a more than 15 year run of massive outperformance by domestic stocks, investors were reminded why they don’t just own the S&P 500.
International stocks outperformed domestic stocks by one of the widest margins ever. Did Europe miraculously get its fiscal house in order? Not at all. Did the demographic challenges across much of Asia somehow reverse? Also no. The number of babies born in China reached an all-time low, while demographics are so bad in Japan they sell more adult diapers than children’s diapers.
International stocks outperformed due to a host of different, and often random, reasons — the U.S. dollar’s dramatic depreciation and massive European stimulus efforts among them. But the point is that these holdings have always deserved, and likely will always deserve, a place in a well-diversified portfolio.
As domestic stocks plummeted by nearly 20% earlier in the year, international stocks were up 10%, helping provide ballast in the storm. Don’t go running toward international stocks now, just like you shouldn’t have run from them previously. Hot dot chasing usually leads to singed fingers, bruised egos and unnecessarily small account balances.
Boring old bonds saw healthy returns as well, after several very difficult years. By some measurements, 2022 was the worst year ever for public market bonds as interest rates spiked higher (it seems bonds are sometimes not so boring after all!). Rates are now trending lower, which works as a tailwind for bond investors and borrowers alike.
The Federal Reserve has reduced interest rates and is under political pressure to push rates even lower. When interest rates are being reduced while the economy is still strong (most interest rate cuts occur during a financial crisis, like with COVID or in 2008), the market has been positive 100% of the time moving forward after the 22 separate times this occurred previously.
This is a great historical precedent. Even the political intrigue that seems so different with the Federal Reserve and Trump right now isn’t really that unusual. Both Jimmy Carter and Richard Nixon (yay for bipartisanship!) blamed the Federal Reserve for losing presidential elections. And Andrew Jackson physically destroyed the Federal Reserve in the 1830s! Market, and political, volatility is older than even our great republic, which is celebrating its 250th birthday in 2026. We should be so thankful we were born when we were and where we were.
With the wave of green highlighted, as both stocks and bonds finished 2025 with healthy returns, it’s easy to forget the volatility that seized markets only eight months prior — it was the fourth-worst start to a year in market history!
As the S&P 500 slid toward a bear market by tumbling almost 20% from mid-February through early April, Wall Street strategists slashed their forecasts at the fastest pace since the COVID crash, only to wind up bumping them back up as stocks staged one of the swiftest comebacks on record.
During the darkest days of tariff-related market volatility, the biggest retail bank in the world (J.P. Morgan) said markets would end 2025 down 12%. The world’s biggest investment bank (Goldman Sachs) has no special clairvoyant powers either. In the midst of COVID, they said markets would be down an additional 15% after already dropping 35%. With the 50% recovery that occurred over the next 100 days, they essentially only missed the mark by a measly 100%. Bigger may be better for bodybuilding, but your size is utterly worthless in helping to foretell the future.
While the magnitude of the 2025 comeback is greater than most, the story of the stock market is really a story of comebacks — one after another. If we look at the S&P 500, every single year has a drawdown, averaging -14% since 1980 as graphed below. Stay the course and stay invested, as all market storms eventually pass. The wise investor embraces volatility by continuing to contribute to retirement plans regularly and/or rebalancing along with tax-loss harvesting, Roth conversions, etc. (when applicable).
This chart shows the maximum intra-year drawdown versus end-of-year total returns via closing prices from 1980 through December 29, 2025. It shows that since 1980, the S&P 500 has had an annualized total return of 12% despite an average intra-year drawdown of 14%. Single-year drawdowns ranged from 3% to 49%, while single-year returns ranged from -37% to 38%.
Another emotional scam to avoid is reluctance to continue investing when markets are at all-time highs due to fear of downturns. After the volatility of early 2025 subsided, the market hit nearly 40 new all-time highs throughout the remainder of the year. As graphed, counterintuitively, forward returns are actually higher after markets hit all-time highs than as compared to any other time period. Does this guarantee positive returns moving forward? Absolutely not. But the odds are against you if the decision is to “wait for a better entry point.” Far more money has been lost in anticipation of downturns than has been lost to the actual downturns themselves.
This chart shows the average forward total returns of the S&P 500 from September 1989 through November 2025. For a one-year period, the new all-time high average is 13.5%, while the average for all other time periods is 11.9%. For a three-year period, the new all-time high average is 44%, while the average for all other time periods is 39%. For a five-year period, the new all-time high average is 82%, while the average for all other time periods is 74%.
Greed, another poisonous emotion that should be avoided, was also on display in 2025. A few high-flying technology stocks soared as excitement associated with AI continued to permeate. The challenge is that this handful of stocks is always changing over time. While it’s technology stocks right now, energy stocks drove markets higher for a long period of time prior. It was steel stocks before that — and railroad stocks before that — all the way back to the equivalent of fire stocks in caveman days.
Markets powering higher have always been driven by a small handful of stocks skyrocketing. Key findings from a related study on shareholder wealth enhancement by Hendrik Bessembinder include:
- Just 3.44% of all U.S. firms accounted for 100% of the net shareholder wealth generated between 1926 and 2022. To put this differently, approximately 97% of all stocks ever issued (there have been nearly 30,000 different stocks) have effectively contributed absolutely nothing to long-term shareholder wealth creation.
- The top 1.88% of companies were responsible for 90% of total stock market gains.
- A mere 0.26% of firms created half of all net shareholder wealth.
The key takeaway is that diversification remains one of the most effective ways to position your portfolio to own the big winners, which produce nearly all shareholder wealth over time. Because we don’t know who those big winners will be, the best strategy is to simply own everything. Why not just try to pick the big winners and exclude everything else? Because that’s nearly impossible to do.
Are we in a bubble associated with technology and AI? Over a long enough time period, the answer is that it’s highly likely. Because there’s never been a significant technological leap forward (e.g., the internet, the industrial revolution, etc.) that hasn’t had a bubble come along with it in some capacity. While a bursting bubble can be momentarily painful, markets always find a way higher over time. We’re sure some poor caveman literally caught fire in his excitement over harnessing the first technological leap forward. It was likely mankind’s first — but definitely not its last — fiery dance with irrational exuberance.
Take the last 50 years as graphed below. There have been many bubbles (like the internet or housing), and lots of other scary stuff has happened too (like the Macarena), but markets always find a way higher over the long run. Cisco stock (essentially the Nvidia of the technology boom that occurred at the turn of the century) only just got back to its all-time high stock price — last reached 25 years ago — in mid-December 2025. The broader stock market over that same time period is up approximately 400%. You participate in the individual winners by not actually trying to pick the individual winners.
This chart shows the growth of $1 in the S&P 500 from September 1989 through October 2025 (ending at $41). Throughout the years, major events linked to market crashes are labeled, such as the European debt crisis, Brexit vote, COVID-19 crash and more, to illustrate the resiliency of the market over time.
As always, it’s prudent to tune out the noise and focus on what you can control. Continue to invest, diversify and optimize your tax and/or estate planning details. Let fundamentals, instead of fear or greed, drive your decision-making. Don’t try to pick winners or losers, and don’t listen to anyone who says they know what’s going to happen over the short run.
Maybe we do report back that we’ve kept our New Year’s resolutions and become chiseled like a Greek god who eats only kale and cauliflower. But, like market performance in the short run, don’t count on it.
Best wishes for a safe and prosperous 2026.
