A (3:39)

Taxes on that profit.

B (3:41)

Yep. Uncle Sam is your partner and he's always got his hand in your pocket. If you buy and hold, you can defer most of those taxes and often all of them until you eventually sell. And the final friction is your own behavior. Most people are very prone to performance chasing when something goes up instead of thinking to ourselves, oh, it's become more expensive. If it was a pair of socks, I wouldn't want to buy it now. But it's not socks, it's stocks and they're going up, so I'm going to buy them. And then when they go down, instead of telling ourselves, oh, they've just gotten cheaper, they're on sale, people say I don't want it anymore because it went down. So when you buy and hold, particularly if you buy and hold one or a few index funds, you short circuit all of those problems and you eliminate that friction.

A (4:52)

Okay, let's talk about 2025 for a minute. A year ago, what did you think was going to happen in the market? And how does that compare to what actually happened in the market?

B (5:05)

Well, I think like, like a lot of people I, I had all kinds of concerns. I guess I was a little skeptical that we would have a really positive return because both 2023 and 24 had been very robust years. And often the stock market goes up three years in a row and it can go up more years in a row than that. But those were two very good returns. And so I was like, eh, maybe we'll get like a slightly positive year. And of course it turned out The S&P 500 was up like 17.9%, a blockbuster.

A (5:52)

Both the S&P 500 and the NASDAQ.

B (5:55)

Soaring to record levels. The dow up almost 13% year to date. The NASDAQ Composite up 20% year to date. And the S&P 500 up more than 16% year to date. Tech stocks in particular are driving markets to all time highs. We're talking the likes of Google, Meta, Microsoft and Apple, despite Ukraine, despite tariffs, despite the stuff about the Fed, Gaza, you know, you name it just went up.

A (6:26)

So what the hell, why? Why did it go up and what's the lesson there?

B (6:33)

Well, the stock market went up because corporate earnings went up and earnings went up in a period of, you know, relatively low interest rates. Exports by us did quite well partly because the US dollar dropped a bit. And all of those things combined to produce just enormous profits for US companies that are also being taxed at a somewhat lower rate thanks to legislation. So when companies earn more money that gets taxed less, their stocks go up.

A (7:18)

So what's your high level prediction for 2026. You went into 2025 thinking the market was maybe going to have a lower performance year. Do you think that's going to be the case this year?

B (7:30)

Well, I'm going to chicken out, but I think the best way to answer the question, what is the stock market going to do in 2026? Or what is any financial market going to do? Is really to say, well, what am I going to do? And how can I conduct myself as an investor and position my portfolio so that whatever the market does, I can either respond in an appropriate way or choose not to respond at all because it isn't really called for?

A (8:09)

There's a lot already going on in 2026, though, that I wonder if it affects your thinking. There's Venezuela, there's the drama at the Fed, and the questions about what's going to happen to interest rates. There's concern about an AI bubble. Does any of that make you think about changing your strategy?

B (8:26)

No, I don't think so, because there's always something to worry about as an investor. And if there were nothing to worry about, that would be the most worrisome thing of all. I'd be terrified if there were nothing to worry about. What we do know about financial markets, and we know this from centuries of history, and we know it from human psychology, is that markets don't react to what people already expect because that's already in the price of all the assets that are traded. What markets react to is the unexpected. So when we find ourselves worrying about the things we can already see, the one thing we can be pretty sure of is we're worrying about the wrong things.

A (9:21)

I want to drill in on the AI bubble. Specifically, when people talk about, is there an AI bubble? Is there not? There's certainly controversy around that. People in the AI industry certainly don't. But what's your take when you just look at the valuations of those stocks?

B (9:36)

Well, I think it'd be crazy not to be concerned about this. And I guess there's two ways to think about it. One is that there are great companies like Nvidia, Google, Meta, Facebook, that are planning to pour trillions of dollars of investment into AI. And the people who run these companies are far from stupid. And the track record of these companies is pretty phenomenal. So that's definitely a positive. What is a lot less positive is there is decades of very rigorous financial research showing that when companies invest a lot of money, they tend to have lower future returns.

A (10:36)

Seems counterintuitive, but I believe you.

B (10:38)

Yeah, a lot of capital expenditure tends to be wasted. So when companies over invest in new technology, the track record tends to be very mixed.

A (10:52)

Also, just like with any new giant technology that seems extremely promising, there often is a lot of investment because everyone's trying to get in on it. And then you know, there's a shakeout to figure out who the real winners and losers are. I mean, you know, look at the Internet bubble, which, not wrong, but just still a bubble.

B (11:09)

That's really the key thing here is that you can be right about how the future will unfold. But if you pay too much for the promise of that future, you're not really going to make any money doing it.

A (11:23)

Do you think the AI bubble could be like the dot com bubble in 2000?

B (11:29)

If you think back to the tech bubble and of course a lot of our listeners might not have suffered through it the way I did, but you know, Internet related stocks lost roughly 85% on average between 2000 and 2002. I mean it's one of the worst destructions of wealth in American history.

A (11:57)

Jeepers.

B (11:58)

So if you bought Internet stocks then.com stocks, you lost almost all your money. If you bought the market as a whole, you certainly didn't do well. You lost about 40, roughly 45% over that three year period. But then the stock market came roaring back. And what I find interesting is if you subtracted the so called magnificent seven, the biggest tech stocks in the country, from last year's 17.9% return, US stocks were still up about 10%. So the non AI stocks gained more than 10%, which is almost exactly their long term average return. So how much damage a collapse in AI would do isn't totally clear. I think it would be very harmful. But I think the stock market would recover maybe faster than people would expect.

A (13:06)

We'll be right back. So we got. I want to turn to some questions that we got from the audience about how to invest in 2026. We got this question from Renan Ulrich who asks what's the low volatility? Sleep well at night investment portfolio. Basically, what's the safest thing you can do this year?

B (13:36)

Diversify. You should basically own everything. The US is roughly two thirds of the total valuation of all the stocks on the planet. So if you have all your money in US stocks, you're missing out on a third of all the opportunities out there. So really the key is if you want to sleep well at night, the greater the variety of assets you own, the less you should have to worry that any particular investment you own can kill you. It's a piece of what you own. It's not the whole thing.

A (14:21)

What about people who are not currently in the market? Right now, the stock market is reaching record highs all the time. It's more expensive than it's ever been. Is now an okay time to get in, or should people wait until the market goes down?

B (14:35)

Well, I think the best advice overall for people is to be gradual. Don't do anything suddenly and don't do anything big. If you're concerned that this is a dangerous time to invest, then invest just a little bit and do it every month. You know, invest $100 a month in, you know, a couple of index funds and just make it. Put yourself on permanent autopilot. Just every month, $100 goes in. And as you earn more money, you can raise that. And that means that you can't lose all your money because you didn't put it all in the market if the market goes down. But if the market goes up, you'll at least make something because you're not out of it entirely.

A (15:35)

We got a question along these lines from Lance Robertson in Eugene, Oregon. Shout out to the Ducks. Go, Ducks.

C (15:43)

Hey. My question is about timing the market. Specifically, I wonder about my investment strategy of selling a very small portion of my portfolio each time the market hits a new high, then using that cash to buy back in when the market has a pullback. Is this considered timing the market or is it a sound strategy?

B (16:05)

Yeah, so it's a great question with kind of a complicated answer. So I think the problem with that approach is taxes and trading costs. And if you. Every time you sell it again, the government is going to take a piece of what you got. And that's just not a good idea over time because it takes such a bite out of your 15%.

A (16:34)

Right. Capital gains.

B (16:35)

Yeah, exactly. And it's better to leave the money in there and let it compound than to try to take it out and put it sort of hold it back and then put it back in. Because if you've just lost 15% of your money to capital gains tax, that means that you have to make almost roughly 20% just to break even after paying the tax. And if you do that over and over again, it's very difficult to make that work.

A (17:16)

Right. So we've talked a lot about, like, when is the stock market going to fall? Is it going to fall? Is there a bubble that might burst? But we got this interesting question from Steven Baranek, who takes a bit of a different angle.

C (17:28)

Hi, my Name's Steve, I'm 66 years old and I'm from Jefferson, Oregon. And here's my question. It appears that there are more employee 401k plans now than ever. While the number of index listed stocks have been cut in half, if the bulk of this 401k money keeps being invested in a shrinking number of stocks, then how can the markets ever go down? And how is this going to end?

B (17:58)

Well, we know markets can go down and will go down. And in fact, even in an environment.

A (18:05)

Where more and more people are constantly putting money in.

B (18:07)

Yeah, exactly. So you know, the 401k wasn't devised until about 1980, but it's been around and has grown to a multi trillion dollar marketplace over the ensuing decades. But just think about it for a minute. The market crashed between 2000 and 2002. It crashed again between 2007 and 2009. It crashed in 2020, it crashed in 2022. And 401 money was pouring in throughout all of those episodes. So markets go up, the stock market goes up when corporate earnings go up. And how much money companies earn is not a function of how much money is going into 401k plans. They just, there's no cause and effect relationship there.

A (19:05)

So it doesn't really matter. Even if more and more people pour into the market, market can still go down, obviously. Because if something spooks people or if they're corporate profits go down, people are going to sell and therefore the market goes down.

B (19:17)

Exactly.

A (19:20)

Any last words of wisdom heading into 2026?

B (19:24)

I would say to people, you know, be careful out there. And one of the exercises that I love to have people do is at the beginning of the year, make a set of predictions. What do you think is going to happen? Instead of asking somebody at the Wall Street Journal what he thinks is going to happen, what do you think is going to happen? What do you think the s and P500 is going to return in 2026? What do you think the best performing major asset will be? Predict where all of those variables, the inflation rate, interest rates, predict where they'll all be at the end of the year. And then at the end of the year, look up the actual answers and look up what you predicted. And I have a prediction that the predictions you actually made will look very little like the actual results.

A (20:27)

So that's your one prediction is that we can't really predict anything very well.

B (20:31)

Yeah, and the lesson from that is, in my view, most people should stop trying to predict.

A (20:39)

Brings us back to just buy and.

B (20:41)

Hold yeah, it kind of does.

A (20:45)

Jason, this has been so much fun. I really appreciate your time.

B (20:48)

My pleasure. Thanks, Ryan.

A (21:02)

That's all for today. Monday, January 12th. The Journal is a co production of Spotify and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts route every weekday afternoon. Thanks for listening. See you tomorrow.