Diversification is not just a defensive strategy but an offensive one too. 2025 was a perfect example, from the start, of how portfolios benefit from both.

The defensive side stepped up early with the U.S. markets poor start and tariff panic in April. The offensive side took over with the recovery. Especially, international and emerging markets, which fared better than the U.S. market in April and went on to produce a blowout performance on the year.

By the end of 2025, emerging markets led with a 34.4% total return (almost double the S&P 500 on the year). International markets followed closely behind at 31.9% total return.

The last time emerging markets outpaced everything, was 2017. Prior to that, it was 2009 (then 2007, 2005, 2003).

In fact, from 2000 to 2009 — while the S&P 500 experienced its lost decade averaging a 0.95% annual loss — emerging markets were only outpaced by U.S. REITs, by a slim margin (REITS at 10.6%/yr, EM at 10.1%/yr). The returns from emerging markets and REITs made up for the drag produced by U.S. stocks, in a diversified portfolio, over that 10-year period.

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Quote for the Week

What the economists call fabrication or demand in use is inversely correlated with price. Or, more simply, you know, if gasoline prices go up, other things equal, you’re going to drive less. So price and demand are inversely correlated: basic economics. And that’s the way it is for things that are used. But in financial markets, it isn’t the case. That actually, demand is positively correlated with price. More people buy things when they go up; if stocks start to go up, more people want them than if they’re going down. The higher they go up, the greater the demand for them. That’s why you see people chasing mutual fund performance; it’s why you see the bubbles that you saw in technology and Internet stocks where all the money flowed in after they’d gone up a lot… It’s been very well established that demand follows price. — Bill Miller (source)

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The asset class, sector, international, and emerging markets quilts are up to date for 2025. Links to the updated versions are below:

• Asset Class Returns
• Sector Returns
• International Market Returns
• Emerging Market Returns

You can also download copies here or grab the images below (screenshots work too). The historical data is updated and available for download as well.

I’ll have the usual deeper dive for you next week.

For now, the lesson of 2025 is not a new one. A home-biased portfolio carries the risk of falling short of a more diversified allocation. That was true for 2025. Allocations into U.S., international, and emerging market stocks produced a better return than a U.S. only allocation.

Broadly, the major asset classes were positive on the year. Emerging and international stocks topped the list with total returns in excess of 30%. U.S. large caps finished the year at 17.9%. U.S. small caps earned 12.8%. High yield bonds, high grade bonds (U.S. Agg), cash (3-mo T-bills), and REITs were next, in that order.

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Quote for the Week

The most important inheritance from the 1930s was simply the memory of it. The habits of mind developed during the terrible experiences of those years kept our business leaders from throwing caution to the winds and from forgetting the realities of risk. A good ten years had to pass before capital spending really took off, and it then languished again soon after the boom topped out in 1957…

Although I just turned 50 in 1969, I was already an old man in the financial community. Similar trends were apparent in the corporate world as well, as leadership was beginning to pass to a generation for whom the Great Depression was something they had only read about in the history books, rather than a real experience. This naturally led to much more carefree attitudes toward risk. Indeed, the new breed were convinced that it was they who were moving the world, they who knew all the answers, they who were masters of the fate of all of us, when in fact the absolutely necessary precondition for their achievements was the sense of caution and care that the older generation had carried forward from the depression era.

This is where this whole long story should drive itself home: the high profits that were the consequence of the caution and conservatism of the past were leading inexorably to overbuilding of capacity, excessive risk-taking, and burgeoning debt leverage. Just when we thought we were masters of our fate, we were preparing a fate much different from what we felt certain lay ahead…

The euphoria of these businessmen was ultimately the cause of its own demise. — Peter Bernstein (source)

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At the end of every year, I do a quick review of the blog and highlight the “best of” in case you missed something.

This year, the blog added:

• 73 new blog posts. The most popular are below.
• 8 new book notes (reading took a hit this year). Brings the total notes to 104 books.
• 40 new quotes. There are now 1,211 finance-related quotes collected and sourced. Philip Fisher quotes were the most popular by author. The most popular quote topic was risk management.
• 67 new pieces were added in the Library.
• 59 extended quotes from those pieces added to the Notebook. Brings the total to 1,446 available to members.

When I started this sixteen years ago, I never expected to do it this long. Thank you for reading and share! I’m grateful for you, the readers, for keeping me plugging along even when some of the writing falls flat. The biggest takeaway over the years is I never know what will resonate. It’s always a surprise to see what others find interesting.

This year’s “best of” list include an historical dive into editorial cartoons on tariffs, learning the wrong lessons in bull markets, why you should be more like a casino as an investor, and Charley Ellis applying lessons from golf to investing.

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Quote for the Week

Despite its irrational aspects, the internet boom was more than a matter of inflated valuations. The optimism of the financial markets not only changed the “fundamentals” of individual businesses, it had real and profound effects throughout the whole economy. The boom did not only follow from the development of the internet; it accelerated that development and contributed to the speed and extension of technological innovation. The same was true in telecommunications, where the boom also accelerated the spread of new technology.

The internet bust, when it finally came, was caused not by an unsound business model, but by over-extension of credit. The present slowdown is affecting the fundamentals of individual companies almost as much as their stock prices; it also affects the financial system and macroeconomic performance.

Instead of a one-way connection in which financial markets discount the future more or less accurately, there exists a two-way connection in which financial markets shape the future they are supposed to discount. Instead of a single outcome, there is a range of possibilities. Which of those possibilities materializes depends not only on the future evolution of the so-called fundamentals but on financial market behavior as well.

In these circumstances, it is irrational for market participants to base their decisions solely on their expectations about fundamentals because the fundamentals do not determine market prices; on the contrary, they are shaped by market conditions. So what matters to market participants is the future course of market prices, not the fundamentals they are said to reflect. If market prices deviate from a theoretical equilibrium there can be no assurance that they will ever return to it. — George Soros (source)

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