January 19, 2026
When we look back at what it was like to invest in 2025, I believe it will be remembered for the President Trump’s “Liberation Day” tariffs that resulted in a stock market scare in early April along with the subsequent recovery and then the surge to record highs in the following months. The threat of tariffs and the subsequent pause of these very same tariffs sent the S&P 500 down over 20% from the recent highs and then it quickly recovered to end up 17.88% in 2025 – just a couple points shy of another +20% stock market return. I would like to use the space in this letter to take a deeper dive into the underlying securities that make up our portfolios. With that said, I would remind the reader that if everything was up 17.88% like the S&P 500 this year, we would most likely not have a diversified portfolio. Thus, you will find some securities underperformed while others outperformed the S&P 500 in 2025.
Fixed Income: I was very pleased with our short-term and intermediate bond performance. For example, the institutional PIMCO Short-term bond fund returned 4.86% while the Schwab Prime Advantage money market returned 4.13%. The other short-term bond fund we used in 2025 was the Vanguard Short-term Inflation Protected bond ETF, which was up 6.06%. I consider any short-term bond fund a success if it beats the underlying money market rates which our two funds did. Moving on to the intermediate space, Vanguard Core Bond, PIMCO Income and Dodge & Cox Income were up 7.72%, 11.04% and 8.32% respectively while the Bloomberg US Aggregate bond index was up 7.3%. 2025 was a great year for bonds.
Large-Cap Domestic Equities: We had more mixed results with our large-cap stocks. The Schwab Total Stock Market Index fund trailed the S&P 500 index 17.06% vs. 17.88%. Perhaps 2026 will be the year small-cap stocks start picking up some of the slack and we will finally see the total stock market outperform the S&P 500. Two underperformers in the large-cap space included Vanguard Dividend Growth (VDIGX) and Berkshire Hathaway. My hope when I pick a fund outside of the index is that it will be down 50% or less when compared to the index during bear markets (a decline of 20% or more), but up 75% or more when compared to the index in up markets. These types of funds tend to outperform over the long run. Evidently, dividend paying stocks were NOT popular with investors this year as most of these types of funds trailed the go-go S&P 500 – our VDIGX and Berkshire Hathaway were among the disappointments. Berkshire Hathaway had one additional worry: Berkshire’s long-time CEO, Warren Buffett, was stepping down at year-end (12/31/25) after a more than six-decade run. According to Jim Cramer of CNBC, Berkshire had an annual growth rate of 19.9% from 1964-2024, which is double the S&P 500’s return over that same time. An extremely capable Greg Abel will be taking the helm. Keep in mind that during the tumultuous stock market storm of 2022 where the S&P 500 was down 19.50%, VDIGX held its own by only being down 4.88% and Berkshire Hathaway was up 3.31%! Thus, VDIGX and Berkshire are considered our equity defense. On a brighter note, the Primecap team had a solid year. Our Vanguard Primecap Fund was up 29.99% to finish within the top 2% of its category. As I write this, this fund is also in the top 4% of funds in its category so far in 2026 with a 4.35% return.
Mid and Small-Cap Equities: The Vanguard S&P 400 Index – our mid-cap stock allocation – was up 7.46% in 2025 while the Vanguard S&P 600 Index ETF was up 6.03% slightly outperforming the Vanguard Tax Managed Small Cap fund (VTMSX) which was up 5.93%. VTMSX is essentially the S&P 600 ETF, but it is managed to minimize taxable distributions. Obviously, VTMSX makes sense to hold in taxable/brokerage accounts. While I was disappointed with our mid/small performance, I can sleep well at night knowing that these two indexes contain companies that are making money, unlike the Russell 2000 small-cap index that is made up of approximately 40% of companies that are losing money. With the anticipation of lower interest rates at the end of 2025 and early 2026, investors bid up lower quality companies (e.g. Russell 2000 index) because they stand to make more as they hold larger amounts of debt than their higher quality, small-cap cousins. I believe quality will win out over the long run and would expect our S&P 400 and 600 indexes to do well should small company stocks rally.
Foreign Equities: I saved the best returns for last. As the tariff talk made the rounds and with foreign stocks crazy cheap to start the year, that set the stage for an international stock rally. I believe Trump’s tariff talk encouraged countries to at least contemplate turning inward and relying on the US less. This meant foreign conglomerates, like Nestle, for example, would rally. And rally they did. While the foreign index we use (MSCI EAFE Index) was up 31.22% in 2025, our favorite value funds, Dodge & Cox International (DODFX) and First Eagle Overseas ETF (FEOE) were up 38.75% and 41.32% respectively! The trouble is, foreign stocks have been a miserable place to invest for years and with the tariffs, I thought it would continue on that path. Like I said, the opposite took place and investors seemed to finally recognize the underlying value in overseas equities. In fact, I recall forward P/E ratios for both funds mentioned above to be around 10 not too long ago. The current P/E ratios are a bit higher, but still much, much lower than the US stock indices. DODFX is at 12.83 while FEOE is 14.5.
Outlook: In last year’s quarter-end letter, I wrote that “Ed Yardeni – an analyst we follow – predicts that the S&P500 (currently around 6,100in 2024) will be at 7,000 by the end of this year (2025), 8,000 by the end of 2026 and 10,000 when 2030 rolls around. He believes, despite Trump’s agenda, the inflation outlook will be low or modest
and the economy will prove to be resilient. There will also be a productivity growth “boom” in the coming years. AI will be leading the charge. The higher productivity will allow corporations to increase their earnings, which investors love to see. This is one of the more bullish cases we have heard.” I recently saw Ed Yardeni on television, and he is sticking to his prediction assuming there is no recession. He thinks we will hit 8,000 at the end of this year and 10,000 ultimately by the end of 2029. Other forecasters are saying 8-10% positive returns by the end of the year. That said, the market could be choppy and I would highly encourage you to pull funds out of stocks if you need them within the next year. Forecasts are one thing, how the market actually performs is something completely different. CJ and I would like to thank you for your continued confidence in our investment management, and we would like to wish you a healthy, happy and prosperous new year!
Some thoughts as we begin the new year:
You can expect to receive your 1099-Composite and Year-End Summary by mid-February from Schwab. Please let us know if you would like us to forward the 1099-Composite and Year-End Summary to your
accountant.
With the new year upon us, this is an excellent time to review your IRA and retirement account beneficiaries to make sure they are up to date. Contact us if you would like us to send you the names Schwab has on file.
You should consider contributing to your Roth IRA if you are able. You have until April 15th to contribute a maximum of $7,000 (plus $1,000 catch-up contribution for those over age 50) for tax year 2025. In 2026, the
Roth IRA contribution maximum climbs to $7,500 with an $1,100 catch-up if 50 or over. Also, consider making Roth 401(k) contributions to your retirement account instead of tax-deferred contributions. It will
cost more now, but your contributions will grow tax-free. It is a great way to put more dollars in Roth accounts.
For those who can afford to maximize their 401(k) contributions in 2026, please note that the maximum you can contribute is now $24,500. For those over the age of 50, the catch-up contribution is $8,000. Age 60-63 catch-up contribution is $11,250. Thus, one could contribute $32,500 in 2026 if they are over 50 and have the means to do so. If you are aged 60-63, you could contribute a whopping $35,750. Please contact us if you need any help with selecting the underlying investments within your retirement account.
Emergency fund: If you don’t have one, I would recommend that you start one. Shoot for 3-6 months of living expenses. You can start this money market account at your bank or credit union. I prefer the money market over certificates of deposit (CD) because the funds are readily available should you need cash for an emergency car repair, for example. If you are dissatisfied with the money market rates at your bank,
Schwab’s Prime Advantage Money Fund – Investor Shares is yielding 3.51% as of this writing