Last week, amid chaos in the financial markets, I attended a parent orientation for my son’s new school. As educators presented diverse learning opportunities to cultivate a range of skills and interests, it was reassuring to hear that a child could be prepared for an ever-changing world with a strong educational foundation. It struck me how closely this mirrors our work as investors and how a well-crafted portfolio is designed to succeed in a variety of market conditions.
The Value of Diversification
The goal of a diversified portfolio— like a balanced education— is to prepare for a wide range of outcomes. Ideally, stocks offer growth, bonds provide stability, and real assets, like real estate or infrastructure, guard against inflation. We prepare not by guessing the future, but by aiming to withstand whatever the future brings. We protect against the possibility of one market sector underperforming by holding others that have uncorrelated drivers of performance, giving the portfolio a balanced chance of growth and stability regardless of the market environment.
We have seen recently how a globally diversified equity portfolio can help hedge fluctuations in growth expectations and currency valuations. In stark contrast to 2024, in Q1 2025 international stocks (as measured by MSCI EAFE) returned almost 8% while the S&P 500 delivered almost -5%.
A Tariff Shock
Just as students eventually specialize based on their strengths and interests, countries benefit from focusing on what they do best – based on natural resources, infrastructure, and workforce skills. This is the essence of globalization. Free trade has helped Americans enjoy more affordable goods while elevating the economy to focus on higher-value services—one reason the U.S. runs a services trade surplus. While income inequality remains a serious issue, globalization has broadly contributed to American prosperity.
Recent announcements of reciprocal tariffs seem to have injected new uncertainty into the markets and clouded the economic outlook, creating heightened volatility. While some manufacturing may return to the U.S., high labor costs and a limited industrial workforce will likely hinder a manufacturing revolution. Most economists agree that tariffs will lead to higher consumer costs and/or lower corporate earnings, ultimately depressing economic growth. Even before these announcements, many businesses had already started pulling back – cutting research budgets and shelving acquisitions due to uncertainty. The potential for a recession is likely dependent on how far-reaching and prolonged these trade disruptions become.
Your Portfolio was Designed for This
While this is a turbulent market, we would not recommend anyone step off this ride. Likewise, I would not encourage my child to abandon their education because they faced challenges or felt uneasy; enduring discomfort is often where true growth and resilience are forged. Life and markets can be emotional rollercoasters. In the end, they usually improve, and we are thankful that we stayed the course.
While it may be tempting to liquidate a portfolio in a volatile market, missing just a few key days of market growth can significantly reduce overall returns. Consider this: between 2005 and 2024, the S&P 500 saw 5,033 trading days. Missing just the top 10 best-performing days would have slashed an investor’s total return by 63%[1]; annualized returns would have dropped from 10.35% to 6.14%. Additionally, pulling money out of the market in down periods makes it more difficult to grow your portfolio with less purchasing power.
The market has recovered from every down period, sometimes slowly, but often quickly, reinforcing the value of staying invested and not trying to time the market. Downturns are routine and can be viewed as an opportunity. Volatility is the price we pay for growth. As we look for potential opportunities to rebalance portfolios this month, investing in assets that may be undervalued can improve future returns.
BSW has attempted to construct an asset allocation and roster of investments based on each investor’s unique goals, risk tolerance, and spending needs. We incorporate factors such as value and quality that aim to reduce volatility and bolster growth. As long-term investors, we don’t advise making changes to a well-considered investment plan based on short-term policy moves.
The Long View
To kick off school orientation, the principal asked each parent to share what they wanted to be when they grew up. The answers ranged from professional surfer to marine biologist to the next Dr. Doolittle. Less than five percent of parents had met their childhood goals, but nearly all seemed to have found a fulfilling life thanks to a basket of different passions and skills. Ultimately, whether we’re raising kids or building wealth, the goal is the same: resilience, adaptability, and long-term success.
Fixed Income Update by Olivia O’Toole
As economic uncertainty continues – driven by persistent inflation, slowing growth and geopolitical risks – we’re facing a challenging fixed income landscape. Stagflation concerns have returned (stagnant growth and high inflation), prompting a focus on the stability and quality of fixed income investments.
High-quality municipal and taxable municipal bonds remain a compelling investment for BSW investors. Unlike corporate debt, which can be more vulnerable in economic downturns, municipals – especially those issued by fiscally strong states and essential services like schools and water systems – aim to provide reliable and consistent income. Additionally, their tax advantages enhance after-tax yields, making them attractive relative to other fixed income sectors.
As we look ahead, we believe municipal bonds are especially appealing for a few key reasons. First, despite economic uncertainty, most state and local governments remain fiscally sound, benefiting from steady tax revenues. Second, as interest rates stabilize or hopefully decline, high-quality municipal bonds stand to gain from price appreciation (prices and interest rates typically move inversely) while continuing to offer reliable income. Finally, with credit spreads widening in the corporate bond space, municipals provide an attractive risk-adjusted alternative without exposure to corporate volatility.
For short-term cash needs, we view U.S. Treasury money market funds as a strategic option. These funds provide government-backed security and easy access to capital – an important consideration in today’s volatile market. While not all investors have these needs, it highlights BSW’s broader theme of attempting to balance safety, income and flexibility in fixed income portfolios.
Ultimately, in an era of economic and political uncertainty, we believe maintaining a high-quality bond allocation and a disciplined investment strategy is crucial. By focusing on resilience and long-term stability, our goal is to navigate shifting market conditions while preserving capital and generating steady income.
Equities Update by Dmitry Popov
Markets don’t like surprises. And the first quarter of 2025 offered more than a few.
U.S. equities stumbled hard, dragging down the broader MSCI All Country World Index. Potentially lofty valuations seemed to finally meet gravity, and policy uncertainty added a dose of turbulence. Meanwhile, non-U.S. stocks quietly rallied—outperforming U.S. equities by one of the largest margins since the 1980s. For investors who’ve grown used to American tech dominance, it’s worth pausing on this moment.
In short, what we’re seeing appears to be a recalibration. Markets are adjusting to a reality that’s less predictable, less U.S.-centric, and potentially more complicated. Corrections, while painful, are not anomalies—they can be essential. They cool speculation, reset expectations, and sometimes give investors a better shot at future returns.
Yes, confidence has dipped. But despite the headlines, there’s little evidence we’re heading into an economic freefall. In fact, for those with long-term conviction, the recent pullback may present a rare opportunity—quality U.S. companies at better prices. The hard part is knowing whether those prices are truly “better” or just beginning to reflect deeper concerns.
Much of this quarter’s volatility seems to trace back to a growing unease over economic policy—specifically, talk of new tariffs and shifting fiscal priorities. Investors, consumers, and businesses are all trying to make sense of a potential world where inflation stays high, growth slows, and the rules of the game keep changing. In other words, policy uncertainty is quickly becoming the new risk premium.
Even the dollar’s role as a safe haven is under question. U.S. Treasuries, once considered a bedrock, may no longer feel like a sure bet for foreign holders of U.S. debt. If faith in American policy continues to wobble, how long before global appetite for U.S. equities begins to weaken too?
America may still be the best house on the block, but the roof might start leaking, and the neighbors are getting louder. In our opinion, that doesn’t mean sell everything and flee. It means reassess. Diversify. Look beyond the familiar. And ask yourself: what does “best” really mean going forward?
The smartest investors aren’t the ones who predict the future perfectly—but the ones who adapt thoughtfully when the world changes.
Real Asset Update by Elias Bachmann
If you’re looking for a proxy for the investment real estate market, the Vanguard Real Estate ETF (VNQ) is a solid start. It holds 158 property REITs spanning Data Centers, Timber, Residential, Office, Retail, and Industrial. Since peaking on 12/31/2021—around the time the Fed still called inflation “transitory”—VNQ has dropped 27.91% in price, or 18.03% when including dividends. That chart tells the story of COVID, inflation, interest rate hikes, supply chain snarls, and now tariffs.
In our own stable of managers, some business plans have taken longer to execute. Regulatory hurdles have made it harder to separate from non-paying tenants, and office/retail have faced seismic shifts. After the go-go real estate days of 2009–2021, many investors forgot how cyclical real estate can be.
But with challenge often comes opportunity. We believe much of the adjustment is behind us, as both public and private REIT pricing flattens out. There appears to be meaningful upside in residential—especially as new construction slows, household formation rises, and homeownership remains out of reach for many. That supply-demand dynamic seems to favor future income growth.
Office has been the hardest-hit asset class. It is hard to imagine a full return to pre-COVID office usage—but the tide has turned, and more workplaces are requiring in-office schedules. Quality locations should see rent and occupancy growth. Others may present opportunities for redevelopment, while others offer deep value investment opportunities because of their depressed prices.
Finally—tariffs. We’re likely not going back to pre-Trump 1.0 levels anytime soon. While tariffs can raise material costs, many construction inputs are sourced domestically or from lower-tariff regions. Long-term, tariffs might boost domestic manufacturing and stabilize supply chains. But for now, developers appear to have added costs and uncertainty into their models, sending land and labor costs lower as fewer starts compete for these and other inputs. Those who adapt and invest early may be best positioned when clarity returns. As Warren Buffet says: “…be greedy when others are fearful.”
Private Equity Update by Aaron Deitz
Private Equity entered 2025 on stronger footing, building on momentum from 2024. In Q1, we saw continued increases in dealmaking and exit activity, alongside anecdotal evidence of a pickup in distributions by our managers. Still, uncertainty remains the dominant force heading into the rest of the year.
Rising tariffs, potential federal spending cuts, and shifting sentiment seem to be injecting volatility into markets. Macro uncertainty is now weighing on IPO markets, delaying or postponing offerings and potentially reducing exit momentum. Despite this, we believe private equity remains a compelling tool for managing portfolio volatility. Unlike public markets—where sharp price swings have recently occurred—private investments are typically marked monthly or quarterly, offering a potentially smoother ride for investors.
That said, these headwinds may also create opportunities. If broader macro pressures result in valuation dislocations, long-term investors may find attractive entry points. Additionally, secondary market activity often picks up during periods of stress, which our managers may be well-positioned to capitalize on.
In a higher tariff environment, the operational playbook becomes critical. We expect many of our underlying portfolio companies to adapt by passing along price increases, tightening cost controls, and employing a multi-pronged approach to supply chain management to preserve margins.
While volatility may temper some of the optimism coming into the year, we remain confident in our managers’ ability to navigate the choppy waters—supported by decades of experience and a disciplined approach.
[1] https://www.franklintempleton.com/forms-literature/download/COSTM-B
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