Market Lessons from 2025: What Pre-Retirees Should Apply to Their 2026 Strategy

2025 delivered no shortage of market lessons, showing investors just how quickly the economic landscape can shift. As you approach retirement, it may be helpful to reflect on the market’s driving forces and how they impacted your portfolio. Did it stay resilient through ups and downs? Were you committed to your long-term strategy, or were you tempted to make changes when performance dropped?

While the markets don’t repeat the same performance year after year, investor behavior tends to follow similar patterns. Looking back on what happened over the past 12 months may be useful as you build a framework for 2026 (and beyond).

Below, we break down the key themes of the past year and explore what they mean for pre-retirees preparing for the year ahead. 

Even in a year marked by policy uncertainty and tariff shocks, developed and emerging markets delivered standout performance, with combined returns exceeding 20%.¹ The U.S. dollar weakened, boosting the value of overseas holdings for U.S. investors and reinforcing the importance of diversifying investments across regions.

If your portfolio is U.S.-centric, 2025’s international market performance serves as a good reminder that growth doesn’t stem from one single market. While the U.S. has historically led in market growth, economic leadership rotates over time. Well-diversified portfolios are positioned to capture returns when that rotation happens — rather than react to it after the fact. Maintaining exposure to international stocks and bonds can help your portfolio expand its growth potential while reducing country-specific concentration risk.

Artificial intelligence continued to be a dominant market force this year, particularly within the communications, technology, and utilities sectors. Going into 2026 and beyond, its influence will likely continue shaping earnings forecasts, capital allocation, corporate spending, and investor sentiment. Even still, it’s important for investors to maintain an objective approach and avoid chasing AI momentum to the detriment of their portfolios. 

After a strong start to the year, the S&P 500 peaked in February before sliding more than 18% over the following weeks.² This was due in large part to tariff announcements and policy shifts. Treasury yields dropped sharply during that same period as investors sought safety and repositioned their portfolios. Volatility surged, sending it to levels last seen during the early, uncertain days of the Covid-19 pandemic (April 2020).

But just as quickly as the market fell, it recovered. As tariff concerns eased and global investors shifted their attention back to fundamentals, equities staged a powerful rebound, ultimately climbing more than 33% from April’s lows into late November.³ 

These swift market movements, largely caused by geopolitical uncertainty, serve as a timely reminder that the markets can move rapidly, both in their downward and upward trajectories. Rushing to cash out during a downturn can create an adverse impact for investors, essentially “locking in” their losses with no opportunity to recover in the upswing that usually (historically speaking) follows. Those who stay invested even during downturns are better able to benefit as the markets regain their footing. 

Across the Treasury curve, yields declined in 2025. The Federal Reserve cut the federal funds rate in response to cooling labor data, moderating inflation, and an environment trending toward neutral policy. Meanwhile, longer-term rates fell due to expectations of slower growth and future cuts and reduced demand for duration.  

As mentioned above, headline inflation continued to stabilize in 2025, hovering roughly 1% above the Federal Reserve’s long-term 2% target.⁴ However, adjustments across different categories vary significantly. Food and healthcare costs inched higher, for example, while housing costs have fallen. Notably, these are important costs to keep an eye on, as they’ll make up a significant portion of your future retirement budget.

It’s reasonable to assume an average annual inflation rate of around 2.5% to 3%. This is slightly higher than the Federal Reserve’s target rate, but more accurately reflects recent economic behavior. Keep in mind that inflation can be unpredictable, as we encountered historic highs and lows over the last five years. 

As noted, healthcare continues to outpace general inflation, and it’s unlikely this trend will fade soon. Prescription drugs grew modestly year-over-year (1.7%), but medical care services jumped nearly 4%, and hospital-related care rose by almost 6%.⁵   

In 2025, many investors’ ability to remain steadfast in their long-term investment strategy and avoid impulsive, reactive decision-making was put to the test. It also reinforced one of the most essential principles of portfolio management: a strong retirement plan needs to be built to withstand volatility, not avoid it altogether.

Let’s look at a few of the most prominent market lessons from 2025’s market movements and economic trends. 

The shift in global market leadership underscores the importance of diversifying your portfolio across geographies, currencies, and asset classes. Maintaining enough diversification and rebalancing when necessary can help your portfolio maintain its performance and manage risk across various market environments.   

With interest rates decreasing, the cost of borrowing is now less expensive than it was a few years ago. As a result, income from money market assets and fixed income portfolios is expected to be lower in 2026 than it was in 2025. Considering inflation remains slightly elevated, at around 3%, the “real” yield (accounting for inflation) for investors may be marginal. 

While fixed income remains a critical component for pre-retirees and retirees to maintain in their portfolios, equity positions are still necessary to achieve growth and protect against inflation. Fixed-income alternatives, like structured assets, may provide a unique risk and return profile that can balance the stability investors look for in fixed income with the growth opportunities and inflation protection of the equity market.  

With healthcare costs on the rise, prepare to spend a significant percentage of your retirement resources on health-related costs, including long-term care and other services not covered through Medicare. 

If you’re currently on a high-deductible health plan (HDHP) or plan to be on one in 2026, you’ll be eligible to contribute to a Health Savings Account (HSA). Amidst rising healthcare costs, HSAs remain one of your most powerful, tax-advantaged tools for addressing this concern.

Contributions to an HSA are tax deductible (up to the annual limit), and funds grow in the account tax deferred. If withdrawals are used on eligible medical expenses, they’re tax-free as well. HSAs stay with you for life, allowing your money to grow between now and retirement.

Often, an investor’s own emotions and reactions can be their biggest enemy, particularly when it comes to maintaining long-term portfolio performance.

For example, because of loss aversion, a known behavioral finance concept, many investors feel compelled to “go to cash” during periods of short-term market decline. Yet, in 2025, those who did were more likely to miss out on the rebound that soon followed. Trying to time your exit to avoid the worst days and capture the best ones is simply a gamble, and one that (often) leads to significant loss. Remember, time in the market is more important than trying to time the market.

The good news is, when you have a plan and a financial professional to help execute it, you’re more likely to stay disciplined and avoid short-term market reactions (which can lead to long-term losses). 

2025 reminded us that markets can move fast. As you continue preparing your portfolio for retirement, keep in mind some of the market lessons you’ve learned over the past year.  Diversification, for example, remains a fundamental investment principle for good reason: you never know when one geographic region or asset class will dominate over others. 

And if you felt compelled to make changes in the wake of volatility, consider connecting with a financial professional to build a more resilient investment plan and outsource your portfolio to objective, evidence-driven experts.