What 2025 Taught Investors About Diversification and Risk

The Year Markets Defied Every Consensus Prediction

At the start of 2025, the investment narrative was clear, almost boringly so: the US stock market was the only show in town, Canadian equities were a sinking ship weighed down by a productivity crisis and tariff threats, and gold was a relic for the fearful. Then the year actually happened.

Canadian stocks returned nearly 29.5% through mid-December 2025. Gold surged 57.5% in Canadian dollar terms. Bitcoin dropped over 13% during a period of intense geopolitical uncertainty — precisely the environment it was supposed to thrive in. Toronto real estate fell another 6.5 percentage points in 2025 alone, now sitting nearly 26% below its 2022 peak. And the US market, the one everyone was piling into, delivered a fraction of the Canadian return when measured in Canadian dollars.

None of this was the consensus. Most of it was the opposite of the consensus. That's the point.

This piece draws on analysis from Ben Felix, Chief Investment Officer at PWL Capital, to extract the durable investment lessons from a year that humbled even experienced market watchers. These aren't abstract principles — they're lessons backed by data that every investor, from DIY index fund holders to clients of managed portfolios, should understand.

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Why International Diversification Still Matters in 2025 and Beyond

The case for concentrating entirely in US equities had never sounded more compelling than it did heading into 2025. Over the five years ending December 31, 2024, the US market outperformed Canadian equities by nearly five percentage points annualised in Canadian dollar terms. Against international developed and emerging markets, the margin was even wider. Extend the window to ten years and the story was the same.

So when investors started asking whether they should abandon international diversification altogether, the question wasn't irrational. It felt like pattern recognition.

But here's what pattern recognition misses in markets: past performance creates sentiment, and sentiment creates mispricing. By the time a narrative becomes consensus, the market has typically already priced the expected continuation of that trend. What happens next is determined not by whether things are good or bad in absolute terms, but whether they are better or worse than what was already priced in.

In 2025, Canadian stocks didn't just hold their own — they more than tripled the Canadian dollar return of a US total market index fund through mid-December. Small-cap Canadian equities, measured by the iShares S&P TSX Small Cap Index ETF, returned an extraordinary 47.94%. Canadian value stocks, via the iShares Canadian Value Index ETF, returned 33.63%.

These aren't numbers that make headlines in the way US tech stocks do. But they represent exactly the kind of returns that a diversified investor captures and a US-only investor misses entirely.

The US had its own lost decade from roughly 2000 to 2010. International and emerging markets significantly outperformed during that stretch. Investors who had abandoned diversification heading into that decade paid a steep price. The principle hasn't changed: no single country's market reliably dominates over full market cycles, and the years when international diversification feels least necessary are often precisely when it matters most.

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The Stock Market Is Not the Economy — A Critical Distinction

One of the most practically useful concepts for investors is also one of the most consistently misunderstood: stock markets are forward-looking pricing mechanisms, not real-time economic scoreboards.

Heading into 2025, Canada faced a genuine economic headwinds list: a documented productivity crisis, a proposed capital gains inclusion rate hike, capital outflows accelerating after the US presidential election, and the looming threat of tariffs from a trade partner that accounts for roughly 75% of Canadian exports. The economic case for pessimism about Canadian equities was not invented by doomsayers — it was grounded in real data.

Yet the Canadian stock market delivered nearly 30% returns in 2025.

How? Because by the time economic concerns become widely reported headlines, markets have typically already priced them in. Stock prices reflect the collective forward-looking expectations of millions of market participants, not the economic data from last quarter. If the actual economic outcome turns out to be bad, but less bad than what the market had anticipated, prices can rise on objectively negative news. It's counterintuitive, but it's how markets work.

This mechanism also explains the US market's mid-year volatility. The announcement of unexpected tariffs in early 2025 pushed the US market down more than 16% in Canadian dollar terms by April. But as the actual implementation and economic impact of those tariffs became clearer — and markets recalibrated their expectations — prices recovered. Negative intra-year drawdowns do not reliably predict negative full-year returns. History shows this repeatedly, and 2025 was another data point confirming it.

The practical takeaway: investment decisions based on economic news are almost always fighting the last war. By the time the headline is written, the market has moved on.

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Gold's Record Run — And Why Chasing It Is Dangerous

Gold's 2025 performance was remarkable by any measure. The iShares Gold Bullion ETF returned 57.53% in Canadian dollar terms from January through mid-December. For investors who held gold coming into the year, congratulations are warranted.

But here's the discipline test: does one exceptional year change the fundamental case for holding gold in a long-term portfolio?

The academic evidence on gold's long-term expected return is fairly consistent. Over periods of 100 years or more, gold's real return — that is, its return above inflation — is approximately 1% annually, and some estimates place it even lower than that. Gold produces no earnings, pays no dividends, and generates no cash flow. Its price is driven primarily by sentiment, fear, and the expectation that future buyers will value it more highly. As Warren Buffett has put it, buying gold is essentially a bet that the ranks of the fearful will grow.

Historically, when gold prices spike sharply — as they did in the late 1970s and again in the early 2010s — the most common subsequent outcome is a period of underperformance as the real price reverts toward its long-term trend. This isn't a guaranteed outcome, but it is the base rate.

The danger in 2025's gold story is a well-documented behavioural trap: investors tend to buy assets after they have performed well and sell after they have performed poorly. This recency bias systematically produces poor outcomes because it leads to buying high and selling low. Someone drawn to gold today because of its 57% return is making a decision anchored almost entirely on recent performance — the weakest possible foundation for a long-term investment thesis.

None of this means gold has no role for any investor under any circumstances. Some institutional investors use it for specific portfolio construction purposes. But the evidence does not support chasing it because the chart looked good last year.

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Renting vs. Owning: The 2025 Data Shift

For years, the rent-versus-own debate in Canada had a clear answer in most cities: buy if you can. That conclusion was embedded in data running from 2005 through 2024 across 12 Canadian cities, which showed an average renter-to-owner wealth ratio of approximately 0.99 — essentially a tie, with a tiny edge to ownership.

That conclusion is now changing in real time.

Through November 2025, the same analysis shows an average renter-to-owner wealth ratio of 1.14, meaning renters who invested their cost savings in the stock market now hold more wealth on average than comparable homeowners across those same 12 cities. In cities like Victoria and Kitchener-Waterloo, which previously showed significant ownership advantages over the 2005–2024 sample, the wealth gap has narrowed to near zero.

The mechanics are straightforward: Toronto composite real estate prices are down nearly 26% from their 2022 peak, with single-family home prices declining by a larger percentage than apartments. Rents are flat or slightly declining in major urban centres. Meanwhile, Canadian equity markets delivered nearly 30% returns in 2025. When you stack those forces simultaneously, the arithmetic shifts decisively toward the investor who rented and stayed invested in equities.

This does not mean homeownership is a bad decision. It means renting is not a financially irrational decision, provided the renter maintains the discipline to save the cost difference and invest it systematically. The homeownership advantage has always depended partly on the forced savings mechanism of mortgage payments. A disciplined renter running an index fund portfolio captures similar or greater wealth accumulation — and 2025 made that case more forcefully than almost any prior year in the data set.

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The Case for Factor Tilts: Small-Cap and Value in Focus

One of the less-publicised stories of 2025 is the strong performance of Canadian small-cap and value stocks — and what it means for investors who had been questioning whether factor-based investing still works.

At the end of 2024, the 10-year returns of Canadian small-cap stocks significantly lagged the broad Canadian market. Value stocks were only modestly behind. The extended underperformance had, predictably, caused investor frustration and prompted questions about whether these strategies retained their validity.

By mid-December 2025, the picture had changed materially. Canadian small-cap stocks returned nearly 48% for the year. Canadian value stocks returned nearly 34%. Looking at the data from the original starting point — now representing just under 11 years — Canadian value has moved into positive relative territory for the full period, and small-cap's deficit versus the market has narrowed substantially.

This pattern — long periods of underperformance followed by sharp recoveries — is precisely what the academic literature on factor investing predicts. Factors like value and small-cap carry risk premiums that are not free money. They require investors to endure extended drawdowns relative to the market before those premiums are realised. The investors who captured 2025's factor returns were the ones who stayed invested through the years when it wasn't working.

A significant development on this front is the upcoming launch of Avantis Investors ETFs in Canada through a partnership with CIBC. Avantis, a direct competitor to Dimensional Fund Advisors, offers broadly diversified, low-cost funds that systematically tilt toward small-cap, value, and high-profitability stocks — the same factor exposures used by many institutional and advisor-managed portfolios. The preliminary prospectus lists a management fee of 0.28% for their all-equity asset allocation ETF, with an asset mix of approximately 45% US, 32% Canadian, 15% international developed, and 8% emerging markets. The key development: unlike Dimensional funds, which in Canada are only accessible through advisors, these ETFs will be available directly to retail investors. For evidence-based DIY investors, this is a meaningful expansion of accessible tools.

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Staying in Your Seat: The Most Underrated Investment Skill

If there is a single thread connecting every lesson from 2025, it is this: the investors who benefited most were the ones who did nothing.

They didn't abandon international diversification when the US was dominant. They didn't sell Canadian equities when the economic headlines were bleak. They didn't exit the market in April when the US was down 16%. They didn't chase gold's run in the second half of the year. They stayed diversified, stayed invested, and let the markets do their work.

This is not a passive or passive-aggressive observation. It reflects a hard truth about how long-term wealth is built: returns in any asset class or strategy often come in sharp, concentrated bursts. Missing those bursts — because you were in cash, or had shifted to a different allocation, or were waiting for a better entry point — is extraordinarily difficult to recover from. The analogy of leaving to use the bathroom during a hockey game and missing the decisive goal is an apt one. The cost is real, and you don't get a replay.

US market concentration — the top seven stocks representing 32% of total market value, the highest since 1927 — is the concern currently dominating investor conversations heading into the next year. Historical data on concentration and subsequent returns shows a weak and statistically insignificant relationship. High valuations have a clearer historical relationship with lower future returns across developed markets, but the relationship is not reliable enough to trade on. Neither factor constitutes a reason to abandon a long-term plan.

The evidence, from 2025 and from the longer historical record, consistently points in the same direction: broad diversification, low costs, and disciplined consistency remain the most reliable path to long-term investment outcomes.

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Practical Takeaways for Investors

• Don't abandon international diversification based on recent US outperformance. Single-country concentration — including in the US — creates meaningful long-term risk.
• Economic headlines are lagging indicators. By the time a narrative dominates the news cycle, markets have typically already priced the expected impact.
• Intra-year drawdowns are normal. A 16% decline mid-year does not predict a negative full-year outcome. Historical data shows this pattern repeatedly.
• Factor investing requires patience. Small-cap and value premiums are real but lumpy. They reward investors who stay invested through underperformance.
• Chasing recent returns is expensive. Gold's 57% return is not a buy signal. It may be precisely the opposite.
• Renting is not financially irrational — provided the renter invests the cost savings consistently in a diversified portfolio.
• Costs matter. Whether evaluating new factor ETFs or existing index funds, the difference between a 0.20% and 0.60% MER compounds significantly over decades.

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This article is for informational purposes only and does not constitute financial advice. Always consult a qualified financial professional before making investment decisions.

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Frequently Asked Questions

Why did Canadian stocks outperform US stocks in 2025? The Canadian stock market returned approximately 29.5% through mid-December 2025, more than tripling the Canadian dollar return of a US total market index fund. The outperformance reflects several factors: the market had already priced in significant economic pessimism about Canada heading into the year, leaving room for positive surprise; Canadian value and small-cap stocks — which are heavily weighted in the TSX — had strong recoveries after years of underperformance; and commodity-linked sectors benefited from global supply dynamics. This does not mean Canadian stocks will continue to outperform, which is precisely why international diversification across multiple markets remains the prudent long-term approach.

Should I add gold to my portfolio after its strong performance? The academic evidence on gold's long-term expected return suggests approximately 1% above inflation annually over very long periods — one of the lowest expected returns among major asset classes. Gold's 57.5% return in Canadian dollar terms in 2025 represents a sharp short-term deviation from its long-term real value. Historically, large price spikes in gold have most commonly been followed by extended periods of underperformance as prices revert toward trend. Investors drawn to gold primarily because of its recent returns should be aware that this is a classic recency bias pattern with a poor historical track record. If you already hold gold as part of a deliberate portfolio construction strategy, that's a different conversation.

Is renting always better than buying a home in Canada? No. The rent-versus-own comparison depends heavily on the specific city, the price-to-rent ratio at the time of purchase, mortgage rates, the investment discipline of the renter, and the time horizon involved. Analysis covering 12 Canadian cities from 2005 through late 2025 shows that outcomes vary significantly by location and period. The key insight is that renting is not inherently a poor financial decision — renters who consistently invest their cost savings in a diversified portfolio can accumulate comparable or greater wealth than homeowners over long periods, as 2025 data increasingly demonstrates. Owning a home also provides non-financial benefits and forced savings discipline that have real value for many people.

What are Avantis ETFs and why are they significant for Canadian investors? Avantis Investors is a US-based asset manager that offers broadly diversified, low-cost funds that systematically tilt toward small-cap, value, and high-profitability stocks — factors supported by decades of academic research on return premiums. Avantis is partnering with CIBC to launch Canadian-listed ETFs, with a preliminary management fee of 0.28% for their all-equity asset allocation product. The significance is that similar strategies from Dimensional Fund Advisors — a close competitor — have historically only been available to Canadian investors through registered investment advisors. Avantis ETFs would give self-directed investors direct access to factor-tilted, evidence-based portfolio construction tools that go beyond standard total market index funds. These funds are expected to launch in 2026.

Does high US market concentration signal a coming crash? Not reliably. The top seven US stocks currently represent approximately 32% of total US market capitalisation — the highest level of concentration since at least 1927. However, historical analysis of the relationship between US market concentration and subsequent returns shows a weak and statistically insignificant pattern. Many other developed markets operate with higher concentration levels without systematically poor outcomes. High valuations are a more established predictor of lower future returns, but the relationship is not precise enough to inform tactical allocation decisions. Neither factor provides sufficient evidence to justify abandoning a diversified long-term investment plan.