By Alex Carlson, CFP®, Wealth Advisor
As we wrap up 2025, it’s worth taking a moment to reflect on what the past year taught us and how those lessons can help shape a smarter approach to 2026. This year reminded us that fundamentals still matter: diversification and concentration risk must be at the top of our minds and tax planning deserves year-round attention.
Below, we examine these lessons and highlight why they should be carried into the new year.
Diversification and Concentration Risk. Investors today are living through one of the most concentrated equity regimes in decades.1 While that shouldn’t invalidate innovation, it does mean some portfolios have become heavily tied to a small group of U.S. technology and AI-focused companies. For years, large-cap growth has dominated performance, and in 2025 that trend only deepened, with NVIDIA being the first company ever to cross $5 trillion in market cap in late October.2
History has shown us time and again that leadership changes over time. The best- and worst-performing regions, sectors and asset classes rotate frequently, and the spread between them can be wide. Data also suggest that companies entering the top 10 by market cap tend to underperform the broader market over the following 3-10 years.3 Expectations get priced into the market quickly, and once a company becomes a top player, forward returns tend to flatten.3
Additionally, valuations vary widely across regions and sectors, which means future return potential isn’t the same everywhere. While no signal is perfect, owning a mix of attractively priced areas—and rebalancing regularly—has tended to produce more favorable long-term outcomes compared to concentrating in the most expensive parts of the market.
Clients often ask about the Shiller P/E ratio, also known as the Cyclically Adjusted Price-to-Earnings (CAPE) ratio.4 Using it as a context tool, we can see that elevated CAPE readings have historically coincided with lower long‑run return expectations:
Take a look at this month, November 2025, the ratio crossed 40 for the first time since the dot-com bubble in 2000.5 Importantly, CAPE ratios will never tell us exactly when dips will occur, but they are useful for setting expectations. Our takeaway should be to size risk and rebalance with valuation awareness, not to make binary market calls based on a single ratio.
All of this points to how crucial a diversified portfolio is. One that includes exposure across U.S., international developed and emerging markets, as well as across company sizes and return drivers like value, profitability and momentum. Of course, diversification won’t eliminate drawdowns, but it can help improve the distribution of outcomes: fewer extreme left‑tail results, more consistent compounding and better odds of funding goals without perfectly timed moves.
Keep Your Tax Plan in Check. Tax planning is one of the biggest levers we have for improving long-term outcomes, and this year’s legislative changes have made it even more important. With the 2017 Tax Cuts and Jobs Act (TCJA) extended and the Big Beautiful Bill now in play, the landscape has shifted a bit.
Marginal tax brackets have been extended, which may benefit small businesses, high-income earners and working families.6 The bill also introduced some adjustments to state and local tax deductions,7 and provided more flexibility around estate and charitable planning by easing the year-end pressure that would have followed if the TCJA had expired.
At the same time, these changes added complexity. Many of the new provisions include phaseouts and timelines7 that can catch people off guard. As such, now is a good time to revisit your tax plan and make sure it still fits your situation.
Keeping Up to Date with Your Financial Plan. While diversification and tax strategies form the backbone of a resilient portfolio, they are most effective when aligned with a comprehensive financial plan that evolves with your life circumstances.
For many, this means asking the question: “Am I taking on more risk than I think?” A comprehensive review stress tests your plan, your withdrawal strategy and your savings rate against a range of outcomes. It also connects portfolio design to real-world goals, including retirement timing, education funding, business liquidity events, major purchases and legacy or charitable intentions. In that context, diversification and tax strategy are tools to support your plan, not standalone ideas.
The Bottom Line. The lessons from 2025 aren’t new, but this year made them hard to ignore. The Certified Financial Planner (CFP®) Board surveys show that annual reviews boost client confidence in meeting goals.8 As such, we urge clients to connect with their Exencial advisor to ensure your entire financial plan, including portfolio allocation and tax strategies, is up to date. A well-maintained plan translates the noise of 2025 into specific, actionable steps for 2026.
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The Cyclically-Adjusted Price-to-Earnings Ratio (CAPE) is a valuation metric that divides an investment's price by the average of the investment's earnings over the last 10 years, adjusted for inflation.