As we enter the holiday season, it’s a good time to think about what we’re grateful for in both our personal lives and our investments. Investors often worry about what might go wrong instead of celebrating what’s going right. Right now, with markets doing well, it’s useful to look back at the past year. This helps us see things more clearly as we face new challenges and opportunities ahead.
Financial markets (places where stocks and bonds are bought and sold) have made money for investors over time, and this year has been strong too. The S&P 500 (a measure of 500 large U.S. company stocks) has gone up more than 15% including dividends (payments companies make to shareholders) so far this year. Bonds (loans you make to companies or governments that pay you interest) have returned about 7% as measured by the Bloomberg U.S. Aggregate Bond Index (a way to track bond performance). International stocks (stocks of companies outside the U.S.) have done better than U.S. stocks for the first time in many years. Many mixed portfolios (combinations of different investments) have benefited from this strong performance across different types of investments. What should investors think about as they get ready for next year?
The bull market is now in its fourth year
First, investors can feel good that financial markets have done well this year even with some ups and downs. This bull market (a period when markets are going up), which started after markets hit bottom in October 2022, is now in its fourth year.
While what happened in the past doesn’t guarantee what will happen in the future, history shows us that bull markets usually last much longer than bear markets (periods when markets are going down). Bull markets often run for five to ten years or even longer. The typical bull market has made much more money than what we’ve seen so far in this current cycle, even though investors faced many difficulties during those times. While there are real concerns about whether stocks are too expensive and whether too much money is invested in just a few companies, long-term investing means dealing with all kinds of market conditions.
It’s worth noting that bonds have also made money this year after a tough few years of changing interest rates (the cost of borrowing money) and inflation (when prices go up). As rates have steadied and the Federal Reserve (the central bank of the United States) has started lowering rates again, bond prices have gone back up. This shows why holding both stocks and bonds is still important for investment portfolios in terms of both balance and earning income.
This strength highlights an important idea: trying to guess the perfect time to buy or sell based on short-term news is not only hard, but can actually hurt your long-term financial plan. This was true even in April when markets fell close to bear market levels as new trade fees called tariffs were announced. Markets not only bounced back quickly, but reached new record highs. Investors who stayed calm and didn’t panic were rewarded, while those who reacted to news headlines may have missed out on gains and, in some cases, may still be sitting on the sidelines.
Inflation has gotten better and the Fed is lowering rates
Second, investors can be happy that inflation has improved, even if it hasn’t happened as fast as many people hoped. Prices have gone up about 3% over the past year, which is still hard for families and government officials trying to manage the economy. However, from an investment point of view, inflation has been much more steady, and there are fewer worries about inflation getting out of control compared to earlier years.
This has let the Fed start lowering interest rates after keeping them high for most of the year. The Fed is also doing this to help the job market, which has been getting weaker since the summer. In the past, lower rates have helped both stocks and bonds by making it cheaper for businesses and people to borrow money, while also making existing bonds with higher interest rates more valuable. So, even though inflation and interest rates will continue to matter for markets, the fear of constantly rising inflation and interest rates seems to be in the past.
Spreading your investments helps manage risk while finding opportunities
Finally, investors should also value the importance of ongoing risk management (controlling potential losses) and proper asset allocation (how you divide your money among different types of investments). The year ahead will likely bring new uncertainties just like every year does. When this happens, there will naturally be concerns about recessions (when the economy shrinks), bear markets, and whether the current positive cycle is ending. Rather than reacting to every market event, long-term investors should hold an appropriate mix of investments that can handle different phases of the market and economic cycle.
We can also be grateful that we have different types of investments available to help balance risk and reward. Managing risk is important at all times in an investor’s journey, and especially after a three-year rally (period of rising markets). The S&P 500 price-to-earnings ratio (a measure of how expensive stocks are compared to company profits) of 22.6x is higher than average and getting closer to its peak levels during the dot-com bubble (a period in the late 1990s when technology stock prices were extremely high).
These measures of value don’t predict what the market will do in the short-term, so this doesn’t mean markets can’t keep doing well. However, it does suggest that future returns (profits from investments) could be smaller, especially when compared with cheaper types of investments and sectors (different parts of the market). So, it’s important to have realistic expectations and to own different parts of the market with more attractive prices.
Questions about artificial intelligence (computer systems that can learn and make decisions) will continue. It’s natural that the effect on stock prices is hard to predict given how much the technology could change things. This is similar to the challenges of predicting how the internet revolution would unfold starting in the mid-1990s. Political uncertainty is also likely to continue with ongoing changes to tariffs, international tensions, the growing national debt (money the government owes), and more. Recent history shows that overreacting to these events is not only unhelpful, but can throw off your financial plans.
The bottom line? The holiday season is a perfect time to think about the many reasons to be grateful and to review your investment mix. A well-built portfolio balances the benefits of different types of investments and lines them up with your financial goals. This remains the key to handling challenges and opportunities in the year ahead.
We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives.
Advisory services offered through EGSI Investment Management, Inc., a Registered Investment Advisor with the State of Ohio. Insurance services offered through EGSI Financial, Inc.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.
Any references to protection benefits, safety, security, or steady and lifetime income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claimspaying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured.
The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.
Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured.
The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned.
