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The start of 2025 has been quite volatile for investment markets. In the US, Donald Trump’s election to the Presidency has led to new tariffs on neighbours Canada and Mexico. The EU and China are also in the firing line. The result could be a significant disruption in global trade that could upset stock markets.
How should investors act during periods of uncertainty like this? Below, our Teesside financial advisers at Vesta Wealth explain how to navigate two separate (but interconnected) challenges: internal and external influences on our investment decisions.
Two Types of Challenges
Any investor typically faces a host of “headwinds” and “tailwinds” in the economic environment, bearing upon their portfolio. These external influences could be detrimental or beneficial for the investor’s goals, depending on the nature of those goals and the specific situation.
For instance, one external influence could be inflation. If the cost of living is rising rapidly (i.e. faster than the central bank’s 2% target), this puts pressure on policymakers to raise interest rates to keep the price level under control. The knock-on effect could be a headwind on equities as borrowing and input costs get higher for firms, depressing their profits.
However, it is not just the external environment that an investor needs to think about. Internally, their “investor biases” can lead to irrational decision-making based on prejudices and cognitive biases. A common example is “loss aversion”, which refers to the human tendency to avoid a loss more than making gains.
How might these two sets of challenges manifest themselves in 2025, and what can investors do about them as they build their portfolios?
Looking Ahead to 2025
One of the frustrations of being an investor is the lack of certainty about the future. By nature, humans are unpredictable. Whilst rational behaviour is quite predictable, emotional behaviour is not. As mentioned, humans have innate biases that cloud judgements.
Within markets, millions of people are interacting at a given time, with each person influenced by a complex interaction of many factors – including individual brains and organisations. Given the sheer scale of these interactions, it is impossible to predict – with certainty – what will happen in markets and economies.
This does not stop people from trying, of course! The Bank of England (BoE) publishes regular forecasts about the UK economy, along with other organisations like the OBR (Office for Budget Responsibility). Using various tools, they make educated guesses about economic and market performance to help investors and policymakers better prepare.
Here are some trends and influences that have been identified so far in March 2025:
- Trade tensions & protectionism. The US has been vocal in introducing new tariffs under President Trump’s new presidency. The EU, Canada, China, and others have responded by using their own protectionist measures. As such, 2025 will likely see more economic uncertainty and instability due to trade disruption.
- Technological advancement. The rise of artificial intelligence (AI) is raising productivity as well as concerns about job displacement and market volatility.
- Health and changing demographics. Health technologies are advancing, and there is a greater emphasis on nutrition – providing tailwinds to growth in the healthcare sector. At the same time, many developed nations are experiencing ageing populations. This contributes to labour shortages and increases public spending on healthcare and pensions, impacting economic growth.
- Deglobalisation and Relocalisation. Many events are leading countries to turn inward to shield themselves from outside threats. Examples include the 2008 financial crisis, the pandemic (2020), Russia’s invasion of Ukraine and now isolationist rhetoric from the US. In response, countries are focusing more on local markets and supply chains.
Navigating 2025 in Your Mind
With some key external portfolio influences now identified for 2025, how will you navigate your own internal influences when making investment decisions?
For instance, many investors fall prey to focalism when analysing external trends and influences like those above. This is the tendency to “Place too much focus or emphasis on a single factor or piece of information when making judgments or predictions.” This can lead investors to place too much weight on a single variable, disregarding a more holistic analysis.
Another potential issue is “availability bias”. This occurs when an investor overemphasises information that is easily recalled or recent. For instance, in March 2025, the election of Donald Trump to the US presidency is still high in many investors’ minds. Could this distract certain investors from other investment “tailwinds” or “headwinds” that are less salient – e.g. changes to health and demographics?
Investors should be especially wary of confirmation bias in 2025. This refers to our tendency to seek information supporting existing beliefs while ignoring contradictory evidence. Investors increasingly turn to social media for news, getting more stuck in “echo chambers” that reinforce existing beliefs and limit exposure to diverse viewpoints. For investors, this can amplify herd mentality investing – making it more difficult to separate objective market analysis from emotional narratives driven by social trends.
Conclusion & Invitation
For investors, it is important to recognise what you can and cannot control. The external factors bearing on your portfolio can be managed to some degree. Whilst nobody can change inflation or the base rate (main interest rate), you can mitigate their effects using diversification and asset allocation strategies.
You arguably have far greater control over your own investor biases. In 2025, it will help to be aware of possible tailwinds and headwinds and how your biases might manifest in response to them. Here at Vesta Wealth, we can help you do this important work to optimise your portfolio.
To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria or Teesside.
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. Content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.