How to invest in 2026

At the end of 2025, we produced our Quarterly Market Commentary which examined the state of global investment markets, economic trends, and the shifting geopolitical landscape. In this article, we look at what this all means for investors going forward.

Overview – the starting point

After three consecutive years of rising markets, it would be understandable for investors to approach 2026 with confidence. Global equities have defied repeated warnings of an imminent crash, inflation has eased from its peaks and interest rates are finally moving lower.

And yet, beneath the optimism, unease remains. Valuations in parts of the market look stretched, politics is becoming noisier and the final stages of long bull markets are rarely calm. History suggests that while staying invested remains essential, it pays to be more selective and better diversified as cycles mature.

So how should investors position their portfolios for the year ahead?

Stay invested – but recognise where we are in the cycle

The starting point for 2026 should still be participation, not retreat. Economic growth remains broadly intact and modest monetary easing should provide support. Historically, major market downturns are rare without a recession, and that still looks unlikely in the near term.

That said, markets are clearly in the later stages of the cycle. One useful framework is the four-stage rotation from despair to hope, growth and optimism. The pandemic marked the despair phase, followed by a rapid move into hope in 2020. The growth phase, driven by earnings rather than valuation expansion, was unusually short, interrupted by the sharp rise in interest rates in 2022.

For the past three years, markets have been firmly in the optimism phase. Confidence has risen, valuations have expanded again and returns have been strong – inflation-adjusted gains of around 70 per cent are unusual, but not unprecedented.

What matters now is whether the fundamentals can continue to support optimism. For the moment, they just about do. Earnings growth is expected to remain in the low double digits through 2026 and into 2027, helping to justify elevated valuations. But expectations are high, leaving little room for disappointment.

Diversify globally – leadership is shifting

If there is one clear lesson from 2025, it is that market leadership does not stand still. After years of dominance, US equities lagged behind Europe, Japan and emerging markets. There is little reason to assume that US leadership will automatically reassert itself in 2026.

Valuation tells part of the story. US markets now trade at levels that are high even by their own historical standards, with a small number of stocks accounting for an outsized share of market value and earnings growth. By contrast, Europe, the UK and China remain closer to long-term averages.

China stands out in particular. Its progress in areas such as artificial intelligence, electric vehicles and advanced manufacturing increasingly mirrors that of the US, yet valuations remain subdued and investor positioning is light. Japan also offers grounds for cautious optimism, as rising wages, improving corporate governance and an end to deflationary mindsets support domestic demand.

Diversification is not just about geography. Sector balance matters too. While the largest technology firms will remain important drivers of earnings, growth is broadening. As capital spending linked to AI spills over into financials, industrials, energy and materials, parts of the “old economy” are starting to catch up.

Buy selectively – value matters again

As markets broaden, selectivity becomes more important. For much of the past decade, owning a handful of dominant stocks was often enough to deliver strong returns. That dynamic is changing.

Today, high valuations are concentrated in a relatively small group of companies. That creates opportunities elsewhere for investors willing to look beyond the most crowded trades. Businesses with strong balance sheets, resilient cash flows and reasonable valuations are likely to be better placed if volatility rises.

This shift also strengthens the case for active management. As returns become less correlated within markets and sectors, the opportunity to distinguish winners from losers improves. Passive strategies still have a role to play, but relying solely on index exposure may become less effective in the years ahead.

Prepare for volatility – and diversify by asset class

Late-cycle markets are rarely smooth. Choppier trading conditions, political uncertainty and shifting central bank leadership all point to higher volatility in 2026.

This makes diversification across asset classes increasingly important. As interest rates drift lower, cash is likely to become less rewarding, prompting investors to look elsewhere for income and stability. Infrastructure, equity income strategies and selective fixed income can all play a role.

Shorter-duration bonds may be particularly useful while uncertainty remains around the pace and extent of rate cuts. Absolute return funds and other diversifying strategies can also help cushion portfolios during more unsettled periods.

Real assets deserve consideration too. Gold was one of the standout performers of 2025, benefiting from inflation concerns, geopolitical risk and a weaker dollar. While returns of that magnitude are unlikely to be repeated, precious metals and commodities can still act as useful hedges if equities and bonds fall together. Energy and materials may also benefit as demand linked to AI infrastructure continues to grow.

Use tax allowances wisely

Finally, investment returns are only part of the equation. Tax efficiency will matter even more following changes announced in the latest Budget.

Dividend tax rates will rise from April 2026, while relief on venture capital trusts has been reduced. At the same time, the annual Isa allowance remains at £20,000, making it one of the most valuable tools available to investors.

Planned reductions to the cash Isa allowance for under-65s from April 2027 are designed to encourage greater investment. Savers should ensure that any long-term cash is held in tax-efficient wrappers and review how their portfolios are structured well ahead of these changes.

Get financial advice

Markets in 2026 are likely to reward discipline more than bravado. Staying invested, diversifying sensibly and managing risk all sound straightforward, but getting the balance right depends on your personal circumstances, tax position and long-term goals.

A Kellands financial adviser can help you look beyond the headlines and build an investment strategy tailored to you – one that makes the most of available allowances, reflects where we are in the market cycle and is designed to cope with both opportunities and setbacks along the way.

Whether you are reviewing an existing portfolio, planning to invest new money or simply want reassurance that you are on track, speaking to a Kellands adviser can give you the clarity and confidence to invest through 2026 and beyond. Get in touch today.

Please note

This article is for general information only and does not constitute financial advice, which should be based on your individual circumstances.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.

< back to News & Views