So far in 2025 we have seen a Bear Market (a 20% decline from recent highs), as well as a recovery that has the potential to be the fastest on record (2020 the Bear Market recovered in four months, as of today the S&P 500 is still down over 5% from recent highs). On top of that Moody’s has downgraded U.S. Treasuries from AAA (the best rating) to Aa1 (the second-best rating). What does that mean? It means two things. First, Moody’s believes there is some risk, for the first time since the ratings started, that the U.S. may be overextending itself on debt and become unable to pay the agreed upon payments, albeit a very small risk. Until this happened almost everyone who invests in bonds considered U.S. Treasuries the safest place to put your money, even safer than under the mattress. Second, because of the additional risk, now the U.S. has to pay higher interest rates to borrow money. This of course puts further strain on the ability of the U.S. to pay agreed upon payments (known as coupons) on issued Treasuries. Because the U.S. has to pay higher interest rates on Treasuries, many other entities are having to increase the interest rates they pay to attract investors, making it harder for businesses and municipalities to borrow money for everyday operations. Imagine the family living in the biggest house in your city starts having credit card problems, so the bank raises the interest rate they charge you, that’s basically what is happening.

Bright spots?

While that all sounds pretty bad there are several bright spots. First, the economic data. Now, beware, economic data is glacial in it’s pace, so the picture we get from it is MONTHS old. But the latest snapshots we have are that the U.S. was in a strong position 3-4 months ago, like really, really strong. Not quite as good as at the end of 2024, which was the strongest we’ve ever seen, but still, not far off from there. We know supply shocks are coming, they happened in May, which means we’ll see them in the data in August – November (some data is monthly, some quarterly). So the coming decline has strong headwinds it has to fight against to become really, really bad. On top of that, we’ve seen some capitulation to world trade in U.S. policy over the past month. Not as free as it was at the end of 2024, but not as closed off as it looked like it may become.

What to do?

So, what do you, an individual investor, do with all of this information? The same thing you should always be doing. First, make sure you have a healthy emergency fund. That way, if you were to lose your job, you have at least 3 months to find a new one without having to significantly change your habits. Second, max out your employer 401(k) matching if you have it. This is usually between 4 – 6% of your income and is the only way to double your investment money overnight. Then take a step back and consider what you are saving for to decide where to be putting your dollars (education = 529 or brokerage, near-term goals = high yield savings, mid-term goals = brokerage, retirement = IRA, Roth IRA, 401(k), and/or brokerage).

It's all about your risk tolerance

As far as what to invest in, consider your risk tolerance very carefully. If the bottom were to fall out of the stock market it, like it did at the end of February 2020, would you be able to sleep at night having lost 35% of your money? If not, you should not be 100% invested in stocks, and you certainly shouldn’t have more than 10% of your portfolio in individual holdings. Add bonds for stability, and index funds for diversity. The worst thing you can do for your investment portfolio is sell after having experienced losses. The stock market (so far) has always recovered these losses. It can take years to do, but selling means you’ve locked those in, and you may even end up selling at the bottom and missing some of the recovery. So, the last bit of advice is to keep the faith. Stick to your investment strategy and only make small incremental changes after big drops. Don’t ignore your portfolio, but don’t obsess over it either.