Three Key Thoughts:
1.     Ignoring the Noise
2.     Staying Invested
3.     Be Aware of the Big Risks

Ignoring the Noise
2025 was an excellent year for nearly all investment assets. The fourth quarter largely echoed the market trends of the prior two quarters. Here’s a quick rundown: US stocks up on tech earnings and AI optimism; international stocks rise with strong earnings and a weaker dollar; gold is seen as a safe haven, inflation beneficiary and alternative to the dollar; and corporate bonds rallied because a sound economy and strong earnings mean fewer defaults. The only asset that lost in the fourth quarter was crypto currency – and who knows why?

More important though is that all these assets did well in 2025 by doing one thing: ignoring the noise. And there was a lot of noise. Trump’s tariffs, Israel/Hamas/Gaza, Israel/Iran/US, Russia/Ukraine, political assassinations, a long government shutdown, ICE raids, immigration halt, rising unemployment, stubborn inflation, natural disasters and, if that all weren’t enough, we capped the year with Venezuela. Through it all, the markets kept their focus on what was important: a growing economy, relatively stable inflation and growing corporate earnings. The rest, as they say, is just noise.

In the business of media, bad news sells. Regardless of where you get your news, this focus on bad news is universal. Maybe this is one of the reasons why Americans are more depressed about their current economic situation and their future prospects than they have been since the Great Financial Crisis. And yet, the economy is growing, incomes are up, innovations in technology and health care are making our lives better by the year and the US is not fighting any wars.

Another reason for our pessimism may be simply exhaustion at the pace of change we have seen this year. We have said many times that we try to take political views out of the investing process as they are only relevant when there are significant economic policy changes (like major tax law changes or Trump’s tariff plans). But there is no doubt that the pace of activity we have seen from the Trump administration has been unprecedented.

Staying Invested
With all of the bad news lurking, it is tempting to want to just step aside and hold cash. With earnings on cash currently just slightly more than the inflation rate, that doesn’t seem like too bad a choice. Yet if we are able to focus on the positive underlying themes in the economy, we can earn very attractive returns without having to take a great deal of risk. In this endeavor, diversification is our friend because we simply don’t know where the best (or worst) returns will come from.

In 2025, you didn’t have to invest in the hottest technology stocks to have good results. A well-diversified portfolio of US and non-US stocks, corporate bonds, and a mix of a few “alternative” strategies earned a solid double-digit return for the full year. The difference between that return and the return on cash is enormous.

The most important lesson from this is that, so long as you have a longer-term time horizon, it virtually always pays to stay invested. Yes, there will certainly be ups and downs. How many of us remember that the US stock market was down 20% from its peak in April of 2025? It is easy to forget because we recovered that loss by July. That kind of volatility is normal – it happens almost every year!

Be Aware of the Big Risks
Of all the noise we mentioned above, only two of those issues actually pose a major risk to the market values of your investments. The first, and foremost in our view, is inflation. If we were to experience a large and prolonged resurgence in inflation, it would no doubt be a big negative for both bond and stock investments. And like the 1970s, it poses long term risks for financial asset values. Fortunately, this is not a risk that is likely to arise suddenly so we should have at least some time to modify portfolios to adapt to a different environment.

The other risk, which is inherently unpredictable, is a major geopolitical event. Think China attacks Taiwan or Russia intentionally bombs a NATO country. This type of risk is always lurking and there is no way to handicap it. The lesson of history is that we can’t count on dictators to be rational, so we simply have to expect the unexpected and adjust if and when it happens.

Investment Implications
For now, investment fundamentals are positive, with exception of relatively high values. But when fundamentals are good, values can stay high for a long time. We continue to believe that well-diversified portfolios with exposure to global equity and fixed income markets are most appropriate for this environment.