Five lessons from watching the stock market in 2025

I have been watching and writing about the markets for longer than I care to remember. One of the reasons I continue to do so is that every year is different. There is always something to learn. And 2025 has been no exception.

Five of this year’s lessons are worth repeating - two have come from simply observing what has happened; two resulted from crunching the numbers in a bid to understand what was going on; one was simply the consequence of looking in the mirror.

The first observational lesson was a reminder in the spring and over the summer that reacting to apparently negative news can lead us into expensive mistakes. The tariff tantrum between February and April saw US shares fall 19%, narrowly missing the traditional definition of a bear market. Seeking safe havens looked rational after the announcement of swingeing tariffs on America’s trading partners. It was also wrong.

Between early April and the end of October, the S&P 500 index rose by nearly 40%. Almost no one predicted that the market would bounce back so strongly. To do so you would have had to ignore what others were saying. Buying the dips is not always the right thing to do, but when the market has fallen by a fifth in a few weeks, the odds are stacked in your favour. The best time to buy is when it feels hardest. Because it is so difficult, it makes sense to mechanise the process by investing regularly through the ups and downs. And to ignore how you feel as you do it.

A second useful observation this year has been that picking winners is important but hard. In the six years before this one, US equities had been the best performing stock market four times, notching up total returns of more than 25% in three of the periods. With just a few trading sessions left this year, Wall Street is bringing up the rear. Japan, Asia Pacific and the UK have done twice as well. Europe and emerging markets have been two and a half times as profitable.

Almost all of this has been counter-intuitive. Donald Trump’s election promised to put America First. The UK is navigating a set of well-understood economic challenges. You might think that export-focused emerging markets would be obvious victims of a trade war. Europe is politically fragmented, bureaucratic and dealing with a nasty war in its backyard. If you predicted the stock market leaderboard this year, you are better at this than I.

Moving on to the lessons learned from my own analysis. Two of the big market-moving stories this year have been AI and inflation. To try and understand how they would play out in the markets I put a cold towel around my head and crunched the numbers. In both cases I learned something useful.

Deciding whether or not we are in an AI bubble has kept investors busy all year. It is an understandable fear, but bubbles are only ever clear with hindsight. Spotting them in real time is guesswork. Instead, I looked back at the internet bubble of 25 years ago to see what lessons could be learned. And what might be applied today.

Looking at various combinations of old-economy defensive and new-economy growth stocks, held through a range of periods leading up to and following the bursting of the internet bubble, I concluded that the reward for market timing and stock selection can be small. In the absence of a crystal ball telling us what will outperform and when, it makes more sense to hedge our bets with a broad-based portfolio of the voguish shares inflating the bubble and the defensive stocks that will protect you on the way down.

My number crunching around the year’s second big story, inflation, reached a similarly fatalistic conclusion. I was shocked by how devastating even a modest overshoot of the inflation target can be. My research showed that an inflation rate of 3.6% could lead to a pensioner running out of money 11 years earlier than if the Bank of England had achieved its target of 2% inflation. I was also struck by the remedial impact of delaying retirement for just a year or two or achieving even a modestly higher investment return. It’s the power of small numbers magnified by time. The lesson is clear: save more than you think you’ll need and find work you enjoy. You may need to do it for longer than you think.

Which brings me to my look in the mirror moment. The biggest lesson I learned in 2025 is that if you are wholly dependent on the pension savings you have accumulated over a working lifetime, having never had the good fortune of working for an employer offering a final salary pension, the markets look very different at the age of 60 than they did at the age of 30. Time is no longer on your side.

All five of this year’s lessons are variants of ‘the more I learn, the more I realise how little I know’. And that is fine. Not knowing what the future holds is just how it is. It’s how you prepare for the inherent uncertainty in the markets that matters.

You learn not to be surprised when the market rises 40% from an apparently dark place. You realise that this year’s winners will not be what you expect and may or may not be the same as last year’s. You learn that bubbles are hard to predict and harder to time. And that the biggest risk you face as an investor may not be a falling market but rising inflation. Above all, you learn that your children can and should be a lot more relaxed about the ups and downs of the market than you can afford to be.

This article was originally published in The Telegraph.

Get updates on markets, ISA funds, pension saving and much more

• Read: The winners and losers of 2025 - in charts
• Read: Lifting the lid on our UK investments
• Read: Scottish Mortgage: looking to benefit from AI and more

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Investments in emerging markets can be more volatile than other more developed markets. The shares in these investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.