I’m a little late to the annual retrospective party. By the time this piece publishes, we’ll already be a few days into 2026. Even so, the events of 2025 still offer some valuable lessons for investors.
1) It’s tough to make forecasts, especially about the future.
Uncertainty loomed large at the beginning of 2025. Many forecasters were expecting a slowdown in economic growth during the year. The prospect of major changes in US tariff policy only added to the uncertainty, especially when President Donald Trump announced a long list of proposed tariffs that were much higher than previously expected. Market pessimism came to a head in early April, when US equities sold off by more than 10% over a two-day period. Trump’s tariff announcement touched off concerns that tariffs would increase costs for companies and consumers, reduce demand, slow gross domestic product growth, and lead to retaliation by major trading partners.
But these worries proved mostly unfounded. Economic growth and consumer spending remained strong for most of 2025, although the unemployment rate recently reached a four-year high. And thanks in part to a series of rapid shifts in tariff policy, the near-term impact of new surcharges on imported goods was relatively muted.
As a result, investors who sold off stocks in response to the tariff turmoil would have missed out on significant gains. The bigger lesson: It’s always risky to make dramatic portfolio changes based on external events. Even investment experts can’t reliably predict what will happen in the future, and investors are usually better off staying the course.
2) Equity valuations can continue expanding, even if they’re already steep.
By most measures, the US stock market wasn’t cheap at the beginning of 2025. The Shiller P/E ratio, which is based on average inflation-adjusted earnings over a trailing 10-year period, stood at about 32, compared with a longer-term average of about 17, based on data from Multpl.com.
But despite a couple of shorter-term blips, the market continued apace during most of 2025, with the Morningstar US Market Index delivering a 17.4 % gain for the year.
The same applies to the mega-cap artificial intelligence stocks that have driven an outsize portion of the market’s gains in recent years. AI stocks such as Nvidia NVDA and Broadcom AVGO suffered a couple of brief drops during the year, including a sharp decline in January 2025 following the launch of the DeepSeek large language model and again in December 2025. As a whole, though, they continued to deliver some of the best gains of any market sector.
None of this means that valuations don’t matter. As Morningstar’s Jeff Ptak pointed out in a recent article, a 10-year period of outperformance for tech stocks (as well as other sectors) is often followed by a speed bump as valuations drop to more realistic levels. But it illustrates that value investing requires patience, and it’s usually not wise to make dramatic portfolio moves based on valuation concerns.
3) Inflation isn’t dead yet.
Heading into 2025, most industry observers expected inflation to continue moderating, helped in part by declining interest rates. After consumer prices climbed by about 8% for the full year in 2022, inflation eased to a more reasonable 4.10% in 2023 and about 2.95% in 2024. That decline was short-lived, though. Inflation dropped as low as 2.30% in April 2025, but ticked back up to 2.70% in November. That was a bit better than economists had expected for the month but still well above the Federal Reserve’s target level of 2.00%.
Over the trailing 12-month period, prices for areas such as fuel oil, electricity, natural gas, and used cars and trucks saw some of the steepest price increases. Although observers cautioned that data issues could be clouding some of the November data, the most recent reading wasn’t dramatically different from those of the previous few months.
The upshot: Inflation is still something investors should keep on their radar screens. That’s especially true for people approaching retirement because portfolio values may not expand enough to cover inflation, as it takes more dollars to purchase the same amount of goods and services.
To offset the potential impact of inflation, it’s prudent to include some exposure to inflation hedges such as Treasury Inflation-Protected Securities as part of your portfolio’s fixed-income allocation. Building a ladder of TIPS with staggered maturity dates can also be a reliable way to cover inflation-adjusted spending during retirement.
4) The US dollar isn’t invincible.
The US dollar enjoyed an extended period of strength from roughly 2011 through late 2022, fueled by strong economic growth in the United States and the greenback’s status as a refuge during periods of geopolitical uncertainty.
That all changed in 2025. The prospect of weaker economic growth has led to less confidence in dollar-denominated assets. Concerns about the ballooning federal deficit and the stability of the US financial system have also reduced demand for the greenback. In particular, many central banks around the world have been trying to diversify their reserve assets to focus more on nondollar assets, such as gold and other currencies. As a result, the dollar lost about 6% of its value in 2025.
There are some reasons to believe the dollar’s period of weakness could continue. At 119%, the debt/GDP ratio in the United States remains historically high. And even after recent declines, the Nominal Broad U.S. Dollar Index remains on the high end of its range over the past 20 years. That means it’s still prudent to include some nondollar assets in your portfolio, such as unhedged exposure to international stocks.
5) International diversification still works.
In the years following the global financial crisis, US stocks seemed almost invincible. Propelled by strong earnings growth, expanding multiples, and a rising dollar, they pulled ahead of non-US stocks by nearly 7 percentage points per year, on average, from 2009 through 2024. This huge performance gap probably had some investors questioning whether it was even worth it to include international stocks in their portfolios.
But 2025 was a vindication of sorts for global investing. For the year, the Morningstar Global Markets ex-US Index gained 32.4%, compared with 18.2% for the Morningstar US Market Index, with performance driven by lower valuations heading into the year as well as weakness in the dollar.
Although it’s not a given that non-US stocks will continue to pull ahead, there’s still a solid case for diversifying beyond the US market. For one, non-US stocks make up nearly 40% of the total value of publicly traded stocks globally. They can also add diversification value because they generally don’t move in lockstep with US stocks. Over the past three years, the Morningstar Global Markets ex-US Index has had a correlation coefficient of just 0.73 when measured against the Morningstar US Market Index.
Valuation is another argument in favor of investing outside the US. Valuations on most markets outside the United States remain well below those of the US market. My colleagues in Morningstar Investment Management point to opportunities in several areas, including Brazil, China, Mexico, the United Kingdom, and continental Europe.
6) Gold is getting riskier.
Among major asset classes, gold was a standout performer in 2025. Thanks to both retail investor buying and global central banks buying up gold to diversify their reserves away from the US dollar, the yellow metal finished 2025 at $4,341 per ounce, gaining about 67%.
That showing was gold’s best calendar-year performance since 1979, when the price of gold more than doubled amid geopolitical instability, double-digit inflation, a weaker dollar, and speculative buying.
Gold’s performance in both 1979 and 2025 was somewhat out of character for an asset traditionally viewed as a safe haven against market turmoil. Gold held up relatively well when stocks dropped about 10% on tariff worries in early April.
However, the huge runup in gold this year means there’s more risk on the downside going forward. Academic researchers Campbell Harvey and Claude Erb have found that when gold is trading at elevated prices in inflation-adjusted terms, prices often decline in subsequent periods. That happened in 1980, when steep prices were followed by a long period of sluggish returns during most of the following decade. The same pattern showed up when the real price of gold reached a peak in August 2011, which was followed by a sharp downturn from 2013 through 2015.
7) Cryptocurrency is still a speculative asset.
Digital assets have become a bit more mainstream in recent years. The SEC’s approval of 11 spot bitcoin exchange-traded funds in January 2024 was viewed as a symbolic move, capping off the trend toward broader acceptance among both institutions and individual investors of cryptocurrency as a legitimate asset class. In addition, volatility levels for major cryptocurrencies, such as bitcoin and ethereum, have declined to some extent over the past several years.
But any complacency quickly came to an end in September 2025 as traders started selling off their positions and margin calls triggered additional selling. By the end of the year, bitcoin was trading about 30% below its all-time high, and ethereum had dropped about 40% below its peak.
8) There’s no free lunch in private credit and other semiliquid strategies.
Helped along by a looser regulatory environment, asset management firms have been encouraging mom-and-pop investors who have more modest portfolios to venture into the private markets that were previously limited to the ultrawealthy. The pitch is usually based on above-average yield, long-term returns, and diversification value.
But a few events have shed more light on the risks of private credit. Auto supplier First Brands, whose loans were widely held by private credit funds and institutional investors, declared bankruptcy in early October. The bankruptcy process unveiled numerous problems, including opaque disclosure and invoices that were pledged as collateral for more than one credit facility.
The travails of Bluerock Private Real Estate Fund (previously Bluerock Total Income + Real Estate) revealed the downside of combining illiquid holdings with a semiliquid structure. After the closed-end interval fund struggled to meet repurchase demands from shareholders, it changed its structure (with shareholder approval) to become listed on the New York Stock Exchange. Shareholders were then easily able to buy and sell, but the market price quickly dropped more than 40% below net asset value.
