For much of the last few decades, diversification was a simple recipe: balance equities with bonds, sprinkle in some global exposure, and let the long term do the work. But the financial world today looks very different. Rising correlations, market concentration, and evolving tax policy mean that yesterday’s diversification playbook doesn’t always provide the protection Canadians expect.
When Stocks and Bonds Move Together
Historically, bonds acted as a stabilizer in times of equity market stress. That relationship has weakened. Recent analysis from UBS shows that the two-year rolling correlation between equities and government bonds has turned positive at times—meaning both asset classes fell together instead of offsetting each other. In 2022, Canadian investors who held a classic 60/40 portfolio saw one of the worst performances in decades because stocks and bonds declined simultaneously.
This shift doesn’t mean bonds have lost their value, but it does mean relying on them as the only “ballast” in a portfolio may leave investors more exposed than in the past.
Concentration Risk in the Canadian Market
Canadian investors often carry a “home bias,” allocating heavily to domestic equities. But the TSX is far from a broad market: financials, energy, and just a handful of large companies dominate. At times, the top 10 stocks have represented nearly 40% of the index’s total market cap. That concentration leaves portfolios vulnerable to shocks in a few sectors.
The Global Shift: Rethinking Risk in a New Era
Diversification means owning the right things—not more things—for the world we live in now. Global markets are evolving under the weight of inflation cycles, demographic shifts, and geopolitical tension that can ripple across asset classes faster than ever.
For instance, supply chain disruptions and regional conflicts have redefined how global investor's view “safe havens” such as gold, U.S. Treasuries, and even real estate. Meanwhile, the rise of technology giants and the energy transition have concentrated growth in specific sectors and regions, amplifying volatility.
For Canadian investors, this means diversification isn’t only about mixing industries or geographies—it’s about understanding how global events can reshape risk at home. Incorporating assets with low correlation to major equity markets, exploring international private opportunities, and ensuring currency exposure is actively managed are now core parts of a forward-looking diversification plan.
What Modern Diversification Looks Like
So how should Canadians think about diversification today? A modern approach means broadening beyond the traditional mix of public equities and bonds to include asset classes that respond differently to economic conditions.
Real assets such as infrastructure and real estate investment trusts can provide both inflation hedges and steady cash flow. Private equity and private credit offer access to opportunities not available in public markets, while alternative strategies like hedge funds or absolute return funds may buffer volatility when traditional assets move together.
Equally important is where and how assets are held. Incorporating tax-efficient structures can smooth taxable events over time, help manage new inclusion rates, and preserve more wealth for future generations. For business owners, diversification should also integrate corporate assets, personal investments, insurance, and estate planning into a unified strategy.
The Takeaway
The case for diversification hasn’t disappeared—it has evolved. Relying on yesterday’s formulas could leave portfolios under-protected in today’s complex environment. A modern approach blends markets, structures, and strategies into one integrated plan.
If your investment strategy looks the same as it did five or ten years ago, it may be time to revisit it. Speak with your CPA or advisor about whether your current approach still fits today’s realities—or whether modern diversification could better protect and position your wealth for the future.
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