The last decade has seen seismic shifts in geopolitical, macroeconomic, capital market and technological trends.
Today, uncertainty abounds: U.S. policy has become increasingly erratic, and artificial intelligence is advancing at a pace that promises massive productivity gains as well as disruption. How can investors navigate so much change and ongoing uncertainty? Here are some lessons from past periods of uncertainty that can help guide investors moving forward.
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The first lesson is to avoid outsized allocations to an investment, market segment or asset class because investing will always involve unpredictable risk. In 2015, few would have imagined that a decade after the Paris climate conference, the U.S. would withdraw from the agreement and the head of the Environmental Protection Agency would champion regulations with the aim of “driving a dagger through the heart of climate-change religion.”
A decade ago, the Federal funds rate sat at 0.11 per cent, but by 2022 it was 5.5 per cent — after the fastest and most aggressive tightening cycle in decades. Toronto’s office market also quickly reversed course in recent years: Class A vacancy rates reached a decades‑low of 1.8 per cent in 2018 and then climbed to 15.6 per cent by 2024. And in 2015, when Nvidia was still a $20‑billion gaming‑focused company, no one could have seen it becoming the world’s most valuable public company by 2025, with a valuation of roughly $5 trillion.
Big bets expose investors to the risk of significant underperformance if they end up on the wrong side of such dramatic changes. This is why investors need to do the hard work of building diversified portfolios. That means more than just owning government bonds to protect against shorter-term equity market volatility. It means having a broad range of growth-oriented assets.
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Today, that takes considerable work because many conventional public equity indexes are the most concentrated they’ve ever been: 63 per cent of the ACWI index is in the U.S. and nearly 40 per cent of the S&P 500 is in 10 names. Exposure to AI cuts across public equities, infrastructure and credit.
A well-diversified growth portfolio needs to have modest exposures to large-, mid-, and small-cap companies, companies in different geographies and industries, as well as public and private companies and real assets. That kind of diversification requires deliberate effort at the total portfolio level and within each asset class, as well as ongoing monitoring.
The second big lesson for investors is to maintain flexibility so they can adapt. For example, investors have long relied on the U.S. dollar and long nominal bonds to protect them from periods of equity market stress. Both provided strong protection during the dot-com crash, the 2008/09 financial crisis and the start of coronavirus pandemic. But in recent years, both have been less reliable due to higher inflation risk and U.S. policy uncertainty.
This shift should prompt investors to consider whether they need a more diversified safe harbour strategy, including bonds of different durations, nominal and inflation-linked bonds and even different currencies.
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There has also been a real evolution in private markets in recent years. There are more global funds with superior origination and value enhancement capabilities, financing costs are higher and there’s more retail and insurance capital available. In light of potentially lower return expectations going forward, investors might consider their allocation to private assets, find ways to invest in and alongside global funds on cost-effective terms (instead of competing with them) and be prepared to invest in public market equivalents (such as publicly listed utilities or real estate investment trusts) when they represent a superior value proposition.
Adapting to change doesn’t mean trading into and out of things to immediately profit from changes — far from it. There’s often time to adjust when things change. The opportunities in private assets that emerged in recent decades were available to investors even if they weren’t pioneers in the space. Today, investors can adjust their portfolios to reflect the reality of higher returns on cash, higher total portfolio borrowing costs and changed expectations of how the U.S. dollar and long bonds might perform relative to equities in a future equity market crisis.
The last decade has been challenging in many respects, but investors have always operated in uncertain times. Avoiding big bets and being willing to adapt when things change are ways investors can manage this often-uncomfortable reality. As the economist John Maynard Keynes once said: “When the facts change, I change my mind — what do you do?”
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