Don’t look now but as of next Tuesday, we will have reached the halfway point of 2025. It has certainly been an eventful year!

If you’ve been stayed invested throughout this entire period and resisted the temptation to “abandon mission” in March/April, congratulations! Once again, your commitment and ability to resist action based on worst case thinking has been rewarded.

State of Affairs

As I write this post, US equity markets are at (or near) record highs, US economic growth for the second quarter seems poised to reach 3%, inflation is moderating, and the labor market is holding its ground. If you replay news shows or re-read articles from April 2025, few (if any) market pundits saw this coming yet here we are – proving once again that no one (no one!) knows what the future holds.

This rally is perhaps one of the most hated/untrusted in recent memory – as short interest (especially from institutions) remains at all time highs and many continue to site the presence of risk as a reason to avoid markets.

Without a doubt, plenty of risks remain – geopolitical dynamics, never-ending negotiations over the budget/tax bill, daily unpredictable announcements by the Administration (this week’s focus – instillation of a “co Fed Chair” to address Trump’s concerns with Powell and no rate cuts), lack of finality on tariffs, potential for softer earnings as tariffs start to take a bite, and countless others. Any one of these (or a combination of the above and others not even listed) can tip the scales back in a downward direction. While it may seem magnified given the echo chamber we find ourselves in during 2025, the presence of risk in investing is not new. Risk is always present in the world (and in investing). Risk and the resulting potential for volatility is the price we pay for long-term compounding of wealth – it’s always been there.

Path Forward

These is no way to know where we go from here (see above – no one knows (no one – including me!)). However, when I evaluate markets, I always remember that they care far more about “better or worse” than “good or bad.”

Said another way, markets represent the current value of anticipated future events (earnings, cash flows, innovation, productivity, demand etc). Therefore, markets will fluctuate as the reality of those expected events lean more favorably (ie: better) or less favorably (ie: worse) than what was forecasted/priced in.

Look at late April – at that time, the expectations were abysmal – US economy was predicted to be in free fall, earnings estimates were tanking, a belief that inflation would spike was gaining traction etc. Outcomes on all fronts were “better” – and markets mounted a V shaped rally. It didn’t so much matter what the absolute levels of any of those inputs was (ie: good or bad). What mattered was the relative comparison (ie: better or worse).

For markets to continue to march higher, it will be important that reality continues to play out in line (or better) than what is expected/priced in. Given that this rally is still very untrusted and expectations have remained relatively in check, there is a decent probability we will fall into the “better” camp. Time will tell – and the second half of 2025 will undoubtedly be as interesting as the first half.

What Should I Do Now?

If you’ve been reading along for a while, you will recognize the advice below. Some of you may be able to recite it from memory! Yet, I feel it bears repeating as these small actions help build wealth over the long-term in my opinion.

Here are some action items you may wish to complete in the final half of 2025

1. Revisit your list – during the heat of the downfall, I encouraged you to write down how you were feeling. If you took that advice, re-read what you wrote. It’s very easy to forget our emotions, especially negative ones. However, if you really struggled in the correction, it may be worth learning from that and adjusting some things in “good times” – see below for some ideas on how to do just that
2. Revisit allocation – if you had trouble with the downturn, it may be worth looking at your target allocation and making some adjustments. If you can lower risk and still meet your longer run return objectives, perhaps that makes sense for you to remove angst the next time this happens (and it will happen again). Remember, the time to build the metaphorical ark is before it starts to rain!
3. Rebalance against allocation – with the recovery in equities, you may be overweight the asset class (especially if you added to it during the pullback). Now is a great time to rebalance against your target allocation
4. Check concentrations – Concentrated positions feel great on the way up but they can wreak havoc on the way down. If you have heavy weights to certain investments, review them and consider if some trimming may make sense (keep in mind tax impacts of course)
5. Check in on savings plan – hopefully you put cash to work in downturn in line with your savings plan. But if you were too nervous to do that and held back savings, now is a good time to take stock of that. If you have cash on the sidelines that was part of your savings plan for 2025 (ie: part of your 401k max funding or planned IRA contribution), revise your plan and try to reach your goal in the remaining 6 months of the year
6. Assess cash levels – in working with clients, the one thing I know helps ease the pain and stress of a sudden market downturn is a healthy cash allocation. You will never spend your entire portfolio balance in a day, month, year, or even decade – and yet seeing that balance fall by double digit percentage points can make your heart stop. Having unfettered access to cash during a sharp pullback (especially if you are retired and living off your portfolio) eases the pain. You can continue to live your life without the need to liquidate investments at inopportune levels. Now is a great time to rebuild reserves and cash balances and secure cash for 2025 RMDs (work with your advisor to find a good cash level for your situation, spending needs, and long-term goals)

I started this post by congratulating you for staying the course in 2025 and I will end with the same sentiment. Staying invested through a market downturn is NEVER easy. Never! Every time seems different. Every time seems like markets (and your mental well-being) will never recover. Every time challenges. Every time tempts you to abandon years of logic and discipline. And yet, every time you have risen to the challenge and come out the other side. You’ve stayed in – and that is something to be proud of.

Onward we go,