It can be difficult emotionally to be an investor. We feel uneasy if we have a poor year (such as 2022), and even after a few successful years (2023 and 2024), we can still be concerned that some of the progress we have made could be undone in the future. This emotional asymmetry, in which the agony of loss is twice as strong as the satisfaction of gain, is an intrinsic bias with deep evolutionary roots. It may be a barrier for investors, even though it kept us alive in our prehistoric past.
Often known as the “silly season” of investment, analysts, fund managers, and economists use this time of year to forecast the markets for 2025. Markets swiftly and efficiently interpret known knowledge into prices, and prices only fluctuate in response to the unpredictable emergence of new information. In essence, making a 2025 prediction is a wager against the market, which implies that the person making the prediction has superior knowledge or understands the information that is currently available better than the market, which is speculative. You have the advantage of looking past these occasional, short-term market swings as a long-term investor, and you may reap the benefits of embracing this risk by remaining invested.
We have not revised our market projections for 2025. They will go sideways, upward, or downward!
Looking backwards
As the figure below shows, most markets had another strong year last year.
Figure 1: Global investment returns – 2024 and 2023 compared
Data: Live funds used to represent asset classes, in USD. See endnote for details.
Similar to 2023, the US market drove returns on the international stock market, with the “Magnificent Seven” tech stocks being propelled by the election of President Trump, interest rate decreases, and the increased focus on artificial intelligence. These stocks alone accounted for around half of the 25% gains in the US market. About 17% came from the combined developed and emerging markets. Although it is always tempting to wish that one was solely invested in the US market, Nvidia, or the “Mag 7,” each investment has its place and being well-diversified eventually pays off.
Investors in US equities are currently willing to pay more than $5 for every $1 of book value, which is comparable to the peak of the dot.com craze prior to the crash in 2000 (for those who remember!). This serves as a reminder that certain stocks have high expectations for their future earnings, but it is not a market timing signal. They might deliver, they might not. Nobody is aware. As a result, globally diversified portfolios that use tilts to size and value have a lower concentration risk to the “Mag 7.” Defensive, high-quality, shorter-dated bonds yielded roughly 5%. Positively, the US CPI dropped from 3.1% a year earlier to 2.7% (as of November).
In 2024, a globally diversified, balanced portfolio strategy consisting of 60% stocks and 40% bonds produced a gross return of about 9%, and taking into account US inflation increased buying power by almost 7%. That is a positive outcome following a successful 2023 year.
Looking forwards
Without a doubt, we are living in a turbulent moment, as seen by the Middle East crisis, Russia’s war in Ukraine, China’s faltering economy, its increasingly hostile posture towards Taiwan, and Donald Trump’s fresh US presidency. Energy price pressure and rising bond market anxiety over inflation and government debt levels have raised bond yields and raised the prospect, but not the certainty, that interest rates may stay high for some time in the future. Trump’s tariff plans continue to pose an incalculable risk to inflation and the world economy. In 2025, a fair conclusion to the conflict in Ukraine would be a welcome. The only prediction for 2025 is uncertainty!
For investors, the expression “hope for the best but prepare for the worst” is always sensible. It makes sense to start 2025 with the expectation of positive equity, smaller business, and value premia for investors who take an evidence-based, systematic approach to investing. In any given year, we will be disappointed about one-third of the time. The probability of catching these premia, however, rises with time. The best defense against downturns in certain markets and industries, as well as against the fortunes of particular businesses, is diversification.
It is crucial to keep in mind that current prices already reflect forward-looking perspectives. No one knows what will happen next. As always, the secret is to stay diversified, unwavering in the face of market volatility, and focused on your long-term goals.
For many of us, a good New Year’s resolution would be to spend less time reading through the news apps on our phones. Instead, try downloading a positive news app, like Positive News, Goodable, or Squirrel News.
As always, we are optimistic about 2025 from an investment standpoint, but we are also ready for the worst.
“Choose to be optimistic, it feels better.” – Dalai Lama