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On April 2, 2025, President Donald Trump announced tariff rates roughly two times what analysts had expected and roughly 10 times the effective rate of 2%.
The S&P 500 fell by more than 10% in the week following the announcement and almost 20% from peak to trough.
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In the third quarter of 2025, Google had its first quarterly earnings in excess of $100 billion. Billion with a B.
My point is that if you invested based on the first paragraph, your money would be under the mattress. If you invested based on earnings, you probably got paid for it. That’s perhaps the greatest lesson of last year.
Terrible things can be happening, but as long as companies are making more money than expected, markets typically go up.
Here are five other timeless lessons that were reinforced in 2025.
1. No bears live on Park Avenue
Before the 2008 global financial crisis, Michael Burry bet against the housing market in his hedge fund. The story was told in the Michael Lewis book The Big Short and the film of the same name. He made $700 million for his investors and more than $100 million for himself.
The only problem is that he has continued to swing for the fences, incorrectly predicting several more collapses that never happened. The latest was his bet against artificial intelligence. In 2025, he closed his hedge fund.
One often-overlooked challenge of taking a big short, as Burry did, is that you must subsequently catch the swing up. According to J.P. Morgan, the average cumulative return of a bull market is positive 221%. The average loss in a bear market is 39%.
Therefore, historically, investors have generally fared better by participating in both bull and bear markets rather than attempting to sidestep them entirely. Perhaps this is one reason why hedge funds have so much trouble beating the returns of passive indexes over long periods.
Over the last 75 years, there were no negative 20-year periods in stocks. The worst 20-year period had an average annual return of 6%. The best was 18%.
In dollar terms, if you invest $1 million at the absolute worst time, you’d have about $3.2 million 20 years later. If you invested at the absolute best time, that $1 million would turn into about $27 million.
Take a look at the top three people on the Forbes Richest People list. You’ll notice that they made their money by betting on things, not against them. Elon Musk’s fortune is mostly derived from his ownership of Tesla (TSLA). Mark Zuckerberg through Meta (META). Jeff Bezos via Amazon (AMZN). They all bet on things, not against them.
2. Don’t let politics impact your portfolio
There has not been any point in my career where I have seen clients and prospective clients make more politically influenced investment decisions.
Many on the left have sat on the sidelines, in fear, and missed another great year of returns. On the right, if you went all in with the Trump family in crypto at the beginning of the year, you paid dearly.
At the same time, I don’t believe there has ever been a time when politics has had a greater impact on market movements. The president’s announcement of tariffs caused the biggest drop in 2025. His subsequent announcement of a tariff pause caused the best single-day gain.
The challenge is that it’s nearly impossible to know in which direction a political decision or announcement will move the market.
The average annual return of the S&P 500 energy sector under President Joe Biden was almost double what we saw in Trump’s first term. Probably not what you had on your bingo card.
There is an optimal asset allocation you should have, based on your financial plan and your risk tolerance. I believe investors are better off following the plan than the headlines.
If you don’t have a plan, you can build one using the free version of what we use.
3. All-time highs are bullish
The S&P 500 hit 39 all-time highs in 2025. I am still sitting on more cash than an emergency fund should contain. Because I, like you, am human. The higher you start, the more room there is to fall, right? The numbers tell a different story.
If you look at data from FactSet and Standard & Poor’s, you will find all-time highs are historically bullish. There is typically a reason money is piling in. Average three-year returns from January 1, 1988, to December 31, 2024, are 40%.
If you invested the day after an all-time high, your subsequent three-year return would have averaged 46%.
This also explains the great fallacy of mean reversion: What goes up must come down. This is true in things that measure volatility, like the VIX.
However, momentum trumps (no pun intended) mean reversion when it comes to equities.
4. Don’t catch falling knives
In the post-global-financial-crisis period, bold investors have been rewarded for buying the dip.
There is, however, an important differentiator between the gold that has come from buying the dip and the blood that has been spilled from trying to catch a falling knife: Buying that dip tends to work when buying an index that has, historically, always recovered.
Those knives tend to be individual companies that, in some cases, never recover.
Adam Parker of Trivariate Research recently published research based on what he calls “broken compounders.” These are stocks that were previously desirable based on return on invested capital (ROIC) but are now, he believes, structurally disadvantaged.
He highlights names such as Salesforce (CRM), Adobe (ADBE), Nike (NKE) and UnitedHealth (UNH). More familiar historical examples may be Blockbuster and Kodak.
The risk of trying to buy an individual stock while it’s falling is that the decline can persist. As Adam says, it’s “broken.”
5. Diversification works … eventually
Brian Portnoy, a behavioral finance expert, coined the phrase “diversification means always having to say you’re sorry.” In the past 15 years, I can tell you that “I’m sorry” probably wasn’t good enough.
The difference between the high-flying tech allocation and the international value piece warranted getting on one knee and begging for forgiveness. That is, until 2025. Diversification is back … for now.
Tech has not been the best sector year-to-date. U.S. large cap growth stocks and value stocks have returned almost the same amount. Most developed international markets are outperforming the U.S.
Making any of those bets in 2024 would have seemed completely foolish. And I guess that’s just the point.
The top-performing asset class this year: Gold. Maybe those late-night infomercial salesmen were right.
One of my early bosses and mentors always referred to the “three buckets”:
- Bucket one contained the things you had complete control of: brushing your teeth every morning.
- Bucket two had the things you couldn’t control but you could influence: arriving to work on time. You can leave the house early, but you have no control over the traffic backup because of an accident on the highway.
- Bucket three has things you have no control over. The stock market falls into this bucket. You should spend no time here trying to will it to move up and to the right.
There are, however, bucket one and two items that you should focus on.
Just as the stock market tends to reward long-term participation, the Internal Revenue Code tends to reward those who proactively manage complexity. The more time you spend doing tax planning with the tax nerds (guilty!), the more likely you are to control your tax bill.
The lower your internal investment expense, the lower the hurdle you must overcome to make a return. And the more diversified your portfolio, the less volatility you should experience.
This material is for informational and educational purposes only. Past market performance and historical examples are not indicative of future results. Investing involves risk, including the potential loss of principal. Diversification and asset allocation do not guarantee profits or protect against loss.
