- 2025 has proven to be a year where investors who embraced risk have been rewarded.
- By “risk”, we don’t just mean investing in stocks over bonds.
- Investors who have had the stomach to live through the ups and downs of the riskiest parts of the stock market have seen the best returns.
- In the U.S. this means technology and sectors related to artificial intelligence, and in Canada, gold has been a leading sector.
- Risk moves in both directions, and today’s leading sectors were a cause of heartburn for investors in 2022 with drawdowns greater than 30%.
- Dividend-focused strategies have provided a less dramatic ride, but are bound to trail in a “risk-on” market.
- Diversity by country, currency and strategy is key to smoothing out volatility and ensuring we are not shaken out of our seat, which means sacrificing some upside when speculation is in full swing in order to rein in downside risk when the tide inevitably turns.
In the world of investing there is a belief that there is a correlation between the risk taken and the subsequent return earned. The truth is not so simple though. If it were true that taking more risk resulted in guaranteed higher returns, everyone would take the maximum risk in order to earn the highest return. The fact that something is higher risk (a stock versus T-bills, for example) means that it has a possibility of loss, with no guarantee of an eventual gain. This possibility of loss (of unknown magnitude!) is one of the reasons that the vast majority of investors hold diversified portfolios. We would all like to be invested only in securities that are outperforming but we know intuitively that is a risky proposition, as the market’s biggest winners can often turn around sharply and become the biggest losers.
It took a while, but tech is leading again in 2025
2025 is a year where taking risk has been rewarded. High flying, high price/earnings (i.e. expensive) stocks have largely led the major equity indices higher this year, posing a challenge for conservative investors focused on income via bonds and dividend paying stocks. Interestingly, this phenomenon has only come to the fore in recent months. It may seem like a not-so-distant memory now, but heavy volatility characterized much of the first five months of 2025, with dividend stocks leading most of the year through mid-June. That early advantage has been quickly forgotten as speculation has worked its way back into the market psyche, with increased evidence of investors chasing the leading stocks higher in recent weeks, regardless of valuation. In the Canadian market, we have seen a similar phenomenon play out with gold stocks which have played a large part in the TSX’s gains.
What goes up can also go down
We are old enough to remember what the other side of this has looked like and we don’t have to look back too far. The NASDAQ dropped to a 20% loss for the year in the aftermath of “Liberation Day”, but a quick rebound erased these bad memories pretty quickly. 2022 was another matter. After speculation ran rampant in 2021, investors saw what can happen when the tide turns as the NASDAQ posted a 32% loss. Dividend stocks weren’t unscathed, but they did outperform by 25 percentage points, leaving a big hill for the NASDAQ to climb to get back on even terms.
Source: The Harbour Group, Bloomberg
All things in moderation
A theme that we return to often is the value of diversification to protect and grow wealth. Allocating capital exclusively to high-flying sectors has the potential to deliver strong returns, but also ruinous losses. A diversified portfolio that holds both safer and riskier asset classes from multiple countries in both Canadian and U.S. dollars has provided a smoother ride than going “all in” on the trend of the day. This may not be the most exciting way to manage a portfolio, but in our experience it is much better to seek out excitement in other aspects of life and keep our investments as boring as practicable.
The Harbour Group
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