If your investment portfolio spanned the major sectors, geographic regions and asset classes in 2024, you should have plenty to celebrate this holiday season.
The pièce de résistance is that many of those gains were risk-free thanks to the very thing borrowers are cursing: higher interest rates. Yields on fixed income, including guaranteed investment certificates (GICs), topped five per cent.
A year of interest rate cuts are bringing those yields down but investors who locked into longer returns will still reap the benefits in 2025 and beyond.
To put a cherry on top, the major central banks including the Bank of Canada were successful in quelling inflation. That means returns on any investments are closer to real.
Another banner year for global equities
For investors willing to take on the risk of global equity markets, the rewards are staggering. The benchmark S&P 500 advanced 27 per cent, following a 23 per cent gain last year.
For the second year in a row, semiconductors led the charge by posting an 88.4 per cent gain as supply met pend-up demand from the 2020 pandemic.
Auto manufacturers ranked second on the S&P 500 with a gain of 83.5 per cent, followed by consumer electronic stocks, climbing 63.5 per cent.
Canada: How not to diversify
While it might seem like the 17 per cent advance for Canada’s benchmark TSX Composite Index is something to celebrate, it isn’t… unless you own Shopify.
The online retail giant surpassed Royal Bank of Canada as the largest TSX component by increasing in value by 53.5 per cent in 2024.
Canada is a lesson on how not to diversify. In addition to one stock having oversized sway, the TSX holds less than three per cent of the world’s publicly traded stocks. Roughly two-thirds of that tiny sliver are financials or related to natural resources.
There’s still something to celebrate if you own big Canadian energy and bank stocks. The S&P 500 oil and gas index advanced 57 per cent and most of the big banks pulled in double-digit increases thanks to a late-year rally.
Canadian dollar adds insult to injury
Part of global diversification is diversifying your portfolio beyond the Canadian dollar to the accepted global currency: the U.S. dollar.
If you trade a large portion of equities in U.S. dollar denominations and in U.S. dollar accounts, your investment has been getting a lift from the soaring greenback.
If you live in Canada, those U.S. dollars will go much further when you sell.
Inversely, the loonie-denominated investments in your portfolio have shrunk in relation to the U.S. dollar as the Canadian dollar sinks below 70 cents U.S.
Even mutual funds and exchange traded funds (ETFs) with Canadian dollar hedges are eating into returns as the cost of currency protection rises, often nearly a half per cent more annually compared with their unhedged versions.
Broad diversification as a strategy works in minimizing risk while maximizing opportunity, provided it is done properly. It’s best to speak with a qualified advisor about creating the right mix over time.
And time is what you will need if you wait for the Canadian dollar to regain its position on the global stage before trading them for greenbacks. Keep in mind, the loonie topped $1.10 to the U.S. dollar for a short period of time in the aftermath of the 2009 global financial meltdown.
Don’t hold your breath.