Looking Backwards and Forwards for 2025
Being an investor can be emotionally challenging. A bad year like 2022 can make us feel uncomfortable, and even after a couple of good years (2023 and 2024) we may still worry that some of the gains made might be lost going forward. For evolutionary reasons, it is wired into us that losses are felt somewhere near twice as deeply as gains. While this kept us alive in the ancient past, it can be a hindrance for investors.
This time of year is often referred to as investing’s ‘silly season’, where analysts, fund managers, and economists make predictions about the markets for 2025. Most will invariably prove to be wrong. A couple of years ago we reviewed predictions made by so-called experts, they did not fare well. Any sensible pundit should suggest a rise in stock markets, as they tend to go up two-thirds of the time in any given year.
Markets, reflect known information into prices quickly and prices only tend to move on the release of new information which, by its very nature, is unpredictable. ‘New’ information that is predictable will already have, more or less, been priced in. Once information that the market has already anticipated is revealed, it is unlikely to cause much movement.
Predicting what will happen in 2025 is essentially a bet against the market, implying that the guesser has better information, or interprets existing information better than the market, which is unlikely. A longer-term investor, investing for at least 5-10 years, has the luxury of seeing past these short-term, random walks of the markets and has the opportunity to pick up the rewards for taking on this uncertainty by remaining invested.
Looking backwards
Last year was generally another good year for markets and our investment portfolios posted good returns even after fund costs, platform costs and adviser charging are all accounted for.
Figure 1: BpH portfolio investment returns – last 5 years compared1
Despite the pandemic, bond market chaos, rampant inflation, interest rate hikes, political instability and conflicts over the last five years, our portfolios have continued to deliver returns to those who have kept calm and remained invested. Having said this, one victim of the unique set of circumstances in the first half of this decade was the relationship between equity and bond prices.
Persistent inflation and unexpectedly rapid interest rate hikes shocked the world in 2022 and created a perfect storm for bonds. It was the first year since 1994 that the price of both had finished lower than they had started. This does happen occasionally and, while unfortunate, it is important to look at the bigger picture.
We are certainly glad we chose to utilise short-dated and high-quality bonds for our model portfolios, as otherwise 2022 might have been significantly more damaging. Furthermore, looking at expected returns, bondholders are in a strong position for the future now that yields are greater than inflation. More information on bonds and base rates can be found in our article here.
Like in 2023, the US market drove global stock market returns, with the ‘Magnificent Seven’ tech stocks driven higher by investor’s focus on AI as well as interest rate cuts and, more recently, the election of President Trump. These stocks alone contributed around 50% of the total US market gains of 27%. Combined, developed and emerging markets delivered approximately 19%.
The chart below shows the performance of our funds over a one, three, five and ten year period to the end of 2024 after all costs deducted1. The shorter term has certainly been rocky, as demonstrated by the lacklustre returns over the past 3 years to the end of 2024. However, this is exactly why we advise to never invest money that will be needed over time horizons shorter than 5 years. The effects of market volatility fall away over the longer term and committed investors have been rewarded satisfactorily. As expected, those who have taken more risk through greater exposure to equities and property rather than bonds have been rewarded proportionately.
Figure 2: BpH portfolio investment returns – different time periods to the end of 20241
It is always tempting to wish that one was invested only in Nvidia, the ‘Mag 7’, or the US market, but every investment has its day in the sun and being well-diversified pays off in the longer term. It is worth noting that investors in US stocks are currently willing to pay over $5 for every $1 of book value, which is at the same record high as in 2000 at the height of the dot.com mania before the crash. This is not a market timing signal, but a reminder that some stocks have much demanded of them in terms of the future earnings they are expected to deliver.
Diversified global portfolios employing tilts to value and size have a lower concentration risk to large growth stocks like those in the ‘Mag 7’. This may be harder to stomach while stocks like these seem to constantly be defying expectations and reaching new highs. However, this should always be put into the context of the bigger picture, that is one’s lifestyle and financial goals and the returns needed over the long run to achieve them.
It is tempting with hindsight to see that a more focused allocation of investments might have done better, but this would involve taking undue risk and could jeopardise one’s financial position much more severely if the trends of the past don’t continue.
Looking forwards
There is no doubt that we are living in turbulent times, from the conflict in the Middle East, Russia’s war in Ukraine, China’s struggling economy and increasingly aggressive stance towards Taiwan, to the incipient presidency of Donald Trump in the US.
Pressure on energy prices and a growing concern in bond markets about government debt levels and inflation have led to higher bond yields and the possibility – but not certainty – that interest rates could remain higher for longer. Trump’s tariffs and other policies remain an unquantified threat to the global economy and inflation. If there’s one thing we can predict about the latter half of this decade, it is unpredictability.
The old saying, ‘hope for the best but prepare for the worst’, is always a good mindset for investors. For those following an evidence-based, systematic approach to investing, starting 2025 with the expectation of profitability, smaller company, value and market premia2 is sensible.
A recent study of the US market by Dimensional3 highlights that each of the four premiums has an over 50% chance of outperformance, the longer the timeframe, the greater the chance of outperformance. Furthermore, tilts towards all four premiums can help counteract when one or two do underperform. Through an analysis of rolling 10-year periods from 1963, they show that while underperformance of two of these premiums has happened in a minority of cases, there are no historical cases where all three or four of these premiums have all underperformed at the same time4.
It is important to remember that forward-looking views are already reflected in today’s prices. What comes next, no-one truly knows. As ever, the key is to remain highly diversified, resolute in the face of any market setbacks and focused on long-term goals.
From an investing perspective, as ever, we remain hopeful for the best in 2025 but remain prepared for the worst.
“Choose to be optimistic, it feels better.”
-Dalai Lama
From all of us at BpH, we wish you a happy, healthy and prosperous 2025.
Risk Warnings
This article is distributed for educational purposes for UK residents. It should not be considered investment advice, an offer of any security for sale nor a recommendation of any particular security, strategy, platform or investment product. This article contains the opinions of the author but not necessarily the Firm. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of investments can go down as well as up.
1The BpH Core portfolio returns represent portfolios allocated in accordance with BpH’s long-term strategic asset allocation. The portfolio performance is net of platform costs and adviser fees (estd. At 1.2% together) as well as fund costs and represents the total return (dividends re-invested) delivered to investors, calculated on a fund bid-to-bid basis. To replicate typical net returns, other costs have been deducted from both the portfolio and benchmark, which include platform and advice costs, at an estimated rate of 1.20% pa. This fee rate will vary from client to client according to their headline fee rate, which is affected by their assets invested, as well as the providers they are invested with. The return of this portfolio is a proxy for the performance of individual client portfolios which may differ in terms of funds used, asset allocation, rebalancing and the timing of cash flows into or out of their portfolio. Past performance is never a guide to future returns.
2Definitions:
Market premium: The return difference between stocks and short-term Treasury bills.
Size premium: The return difference between small capitalization stocks and large capitalization stocks.
Value premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
Profitability premium: The return difference between stocks of companies with high profitability over those with low profitability.
3Source: Exhibit 1 in ‘Perspective on Premiums’
4Source: Exhibit 2 in ‘Perspective on Premiums’
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