Make It Make Sense: What’s the Best Way to Invest in 2024?

Markets move in cycles, so a strong, diversified portfolio has assets that perform well at different times, says Wealthsimple CIO, Ben Reeves
Ben Reeves (Photography: Wealthsimple)

Welcome to CB’s personal-finance advice column, Make It Make Sense, where each month experts answer reader questions on complex investment and personal-finance topics and break them down in terms we can all understand. This month, Ben Reeves, the chief investment officer at money-management platform Wealthsimple discusses the best way to invest in 2024. Have a question about your finances? Send it to [email protected].

Q: With the markets feeling so risky, is it even worth investing right now when I can get five per cent interest in a savings account or GIC?

I’ve gotten this question a lot lately, and it’s quite reasonable. For the first time in 15 years, you can earn enough interest on your cash to outpace inflation. With most portfolios losing value in 2022, a guaranteed five per cent return in a high-interest savings account can be incredibly appealing. But keeping your money in cash is a short-term solution that can get in the way of long-term wealth building.

If you can’t take on any risk—say you need your money for a downpayment on a house in a few years—cash can be a good option. But for those with less pressing needs, risky assets like stocks have outperformed cash in the long run—by an estimated 4.4 per cent per year since 1900. Instead of thinking about what you can get today, it can be more effective to focus on having a mix of riskier assets to support reaching your longer term goals, like retirement or kids’ tuition. In other words: diversify.

Why be diversified? Because markets move in cycles. For many assets, periods of high returns tend to be followed by periods of low returns, and the inverse is also true. So a good portfolio has assets that perform well at different times. One thing I should point out is that while diversification can help limit your downside, it can also limit upside in the short and medium term. There will be moments when a specific market outperforms a diversified portfolio. But for most investors, that’s a worthwhile trade.

Here are some ways to diversify your portfolio:

Embrace asset-class diversification. Asset classes respond to changes in the economy in different ways. The current high-interest rates, for example, led to some of the worst returns on record for bonds. But they’ve also boosted the yields on an asset like private credit, which relies on floating rates (as interest rates go up or down, so do payments from borrowers). Gold has also outperformed recently. Investors use it to maintain wealth when the markets seem highly uncertain, or there’s negative news, and it can respond positively to some types of inflation.

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Think beyond North America. A rebalanced global portfolio can give you much better odds of good returns, while a geographically concentrated portfolio goes through wilder boom and bust swings. For example, since 1955 most developed-country stock markets have returned about seven per cent more than local inflation, which is similar to the returns of the U.S. market.

Don’t forget defensive stocks. While it’s easy to think that higher volatility stocks (e.g. a company with high growth expectations, like Tesla) lead to higher returns, it’s not always true. Over the last century, lower-volatility stocks (e.g. consumer-staples companies, like Walmart) have actually performed as well as or even slightly better than the risky stuff. That’s not to say you should pile all of your money into defensive stocks. If you did that, you’d miss the times that volatile stocks outperform (often during rallies and bull markets). It makes sense to hold both instead of betting on either—an attempt to reduce a portfolio’s risk without reducing its long-term expectations.

From there, it’s all about patience. Set yourself up for success long term, and don’t get distracted by the short term.

Ben Reeves
Ben Reeves
Ben Reeves is the chief investment officer at Wealthsimple, where he oversees investment strategy, security selection and new fund creation. He enjoys distilling complex financial topics into wealth-building strategies any investor can understand and use. He is a registered advising representative in all provinces and territories in Canada.