From our CIO: Three big investment lessons from 2024

This year was great for the stock market, as continued increases in valuations, combined with solid corporate performance, led to extremely high returns. World central banks switched their focus from fighting inflation and keeping short-term interest rates high, to supporting economic growth and cutting them. Gold came out on top, up 40%. U.S. equities were close behind at 38%, but almost all equity markets, including the TSX (up 25%), experienced above-average performance. The current feeling in markets reflects last year’s nearly uninterrupted rise: individual investors’ holdings of stocks are at all-time highs.

Winners, drawers, and losers

Winner: Disciplined investors

Investors who ignored the gloomy forecasts and headlines were well-rewarded for taking risk this year.

Drawer: Bond investors

Despite a lot of drama and volatility, bond investors earned about the same returns as they would have had by investing in cash.

Loser: Incumbents

In a year that saw half of the global population vote, incumbents were booted almost universally, bringing changes in policy we will feel in 2025 and beyond.

Taking stock of 2024

Overall, 2024 was a good year for many investors. And there’s no better time to reflect on your investing priorities than when you’re feeling comfortable. Here are some of the most important things to keep in mind as you go into next year.

1. Think about risk over the time frame that matters to you

Many of us are working toward longer-term goals, which means that we should think about investment risk and performance over long periods of time — like 10 or even 30 years.

The most important thing when investing for a long time frame is to take enough diversified risk. Once you’re considering a period of 20 years or more, any advantage you might expect from having lower risk tends to evaporate.

2. Prioritize the downside

It’s easy to get distracted trying to maximize long-term returns. But I think most investors should think about their range of outcomes when allocating their assets — and prioritize making sure they have enough if returns are low over a long period of time. The simple reason for this is that the extra income matters more to you when you have less wealth: money gets less useful as you have more of it.

3. Be ready for the boom/bust cycle

History shows that we will all likely see a few major equity market boom/bust cycles in our investing careers. In my lifetime I have seen one extended bust (the money I invested in my retirement fund out of my first paycheque had negative real returns until I was 35) and one extended boom (some money I invested early has more than quintupled in value). I expect to go through probably two more.

You can prepare for them in two ways.

We recommend a well-diversified portfolio, which should manage your performance during both booms and busts. That can help you resist the temptation to change your investing habits based on the state of the market. Whatever portfolio you do choose, it should be one you'll stick with for a long time through multiple cycles.

What I'm keeping my eye on

Risk premiums, or the extra compensation you get for investing in risky assets instead of risk-free government bonds, are arguably what matters most for returns over the long term. They are currently low across all asset classes, particularly U.S. stocks and credit. This doesn’t tell us what the short-term returns will be, but it shows that the economy will need to be very strong for stock returns to stay as high as they’ve been.