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As the year draws to a close, the familiar mix of festive lights, winter routines and end-of-year lists returns. In my house, this includes the annual panic of finding new ways to reposition the Elf on the Shelf — the mischievous Christmas toy that’s supposed to “move” each night — a nightly reminder of how quickly December goes. Looking back, 2025 moved just as quickly for markets. Here are the three lessons the year taught us — and what really mattered for investors.
Real Change, real opportunity, a handful of really exspensive valuations – really important to diversify!
AI remained the defining theme of 2025 — and, unlike past technology crazes, it is genuinely reshaping the world.
Businesses across logistics, healthcare, finance, retail and engineering used AI to cut costs, speed up decisions and boost productivity. J.P. Morgan estimates that AI-related investment contributed around 1.1 percentage points to U.S. GDP growth in the first half of the year — over half of all growth during that period.
Exceptional levels of investment created exceptional returns — and unlike in previous hype cycles, these returns were backed by exceptional profits.
The comparison with the dot-com era is natural, but 1999/2000 was marked by far higher valuations, far weaker profits and six Federal Reserve interest rate hikes totalling 1.75% in just a year. Today’s environment is very different. Adoption is real, demand is broad, interest rates are being cut, and productivity gains are proving durable. The use cases stretch far beyond giving me inspiration for Elf-on-the-Shelf ideas! Where we see risk, however, is index concentration. A “passive” investment in 500 US stocks today gives you exposure where the top 10 names represent around 40% of the index — nearly all tied to AI-related activity. That is not true diversification. Our approach is to offer clients some exposure to these leaders, but within a broader, more diversified allocation to US companies.
Lesson: participate selectively. Diversification doesn’t come from owning the index when the index is so top-heavy.
The sharpest sell-off, the fastest rebound, and why timing doesn’t work
Those who waited for “clarity” in 2025 missed it.
After the biggest two-day sell-off on record for US stocks came the fastest 15% rebound in US equities. The US market now accounts for roughly 70% of the global stock market — its influence really matters.
Markets didn’t send a “we’ve stabilised” email. They simply went up.
This isn’t new. Across decades, a tiny number of the best days account for the majority of long-term returns — and those best days tend to occur immediately after the worst ones, when sentiment is at its lowest.
As the chart below shows, missing just 30 of the best days in a 25-year investing period — only 0.5% of trading days — can reduce returns by roughly £27,000 on a £10,000 starting investment. Nearly the entire gain.
Trying to time the market is like waiting for the Elf on the Shelf to reposition itself. It won’t — and you’ll miss the moment.
2025 reminded us that:
Lesson: stay invested and keep compounding. Compounding remains the closest thing to a free lunch in investing!
The shock is behind us — but inflation isn’t going away
Inflation is down — but by no means out. UK inflation stood at 3.6% in November 2025. The worst is behind us, but prices remain ~30% higher than in 2020. (The McPherson elves may be giving out one Freddo bar rather than two this Christmas).
The chart above highlights three things:
Public debt levels are historically high. US government debt now stands at $38 trillion; UK government debt sits at £3 trillion. Both have grown by around 40% over the last five years, and both face rising debt-service costs (higher as a share of GDP in the UK than in the US).
No Chancellor will say this in a Christmas broadcast, but the fiscal arithmetic is unambiguous:
Inflation has been uncomfortably high — but is now likely to settle comfortably above target. Politicians want interest rates to fall. We’ve seen blunt pressure from President Trump (“the Fed Chair is a moron”) and a more diplomatic approach from Chancellor Reeves (“interest rates should come down further”).
Lesson: inflation is no longer the emergency — but it is a structural feature investors must plan around.
Selectively participate, avoid the froth
Not those waiting for certainty
Being invested matters, so we continue to favour companies with pricing power
