2025 was strong.
Leadership rotated.

Every quarter I write about what happened in markets so you have some perspective on your own portfolio. Rather than covering Q4 on its own, this one looks at 2025 as a whole and at what may be setting up for 2026.

A strong year, unevenly distributed

Index returns in Canadian dollars. Source: Dimensional Fund Advisors Canada. Past performance is no guarantee of future results. All rights reserved.

Canadian stocks led at 31.7%, well above their long-term average near 9.4%. US stocks returned 11.7%, roughly in line with their historical norm but far behind everywhere else. International developed at 25.1% and emerging markets at 27.3% both posted standout years. Global real estate lagged at 2.6% against a long-term average near 8%.

The gains were broad rather than concentrated in one region, which mattered for anyone properly diversified. One of the most common mistakes I see with new clients is trying to time specific countries or regions. When leadership rotates, and it does, they miss the rebound in what they don't own, sometimes by a wide margin.

Bonds did their job

Canadian bonds returned 2.6% and global bonds 3.1%, both below their long-term average near 4% but positive. Bonds are there for stability and income rather than growth, and that's what they delivered.

The other common mistake I see is an over-allocation to fixed income or cash, often GICs, that doesn't match a long-term goal like retirement. The gap between a GIC and a diversified equity allocation over ten or more years can be substantial. What the right mix is depends entirely on your own timeline and circumstances.

Worth adding some nuance here. In a balanced 60/40 portfolio, bonds usually reduce overall risk, but that diversification benefit has varied a lot historically. Through 2000 to 2020 it was greater than in the twenty years before.

That variation doesn't mean the answer is to load up on alternative assets. A lot of portfolio managers use exactly that argument as a sales pitch to replace your bond position, and I'll cover why I disagree in a future issue. The takeaway is simpler: bonds carry risk too, and getting the split between equities, bonds and cash right for your goals is what buys you peace of mind.

Country returns, and why we don't pick

Colombia and Korea led global markets in 2025, posting returns near or above 80% to 90%. Several emerging and smaller developed markets followed with gains in the 50% to 70% range. Those outsized returns came largely from cyclical rebounds and country-specific factors.

Most developed markets, Canada and Europe among them, clustered in the 20% to 40% range. A handful finished flat or negative, with India, the Philippines, Turkey, Saudi Arabia and Denmark among the weakest.

The goal isn't to chase last year's top performer. It's to run a strategy that captures global market returns without having to predict where the next surge comes from.

Sector leadership varied by region

Canada's returns came mainly from materials and financials. The US was more concentrated in communication services and technology. Outside North America, information technology, financials, materials and REITs played a larger role, especially in emerging markets. Another argument for holding sectors globally rather than betting on the ones that led at home.

Factor performance

Global equity market	Size	Value	Growth	High prof.	Low prof.
Large	17.7%	19.9%	15.3%	15.1%	20.4%
Small	11.7%	12.8%	10.5%	9.9%	13.6%

All country markets returns in Canadian dollars, year to date as of December 31, 2025. Source: Dimensional Fund Advisors Canada. Past performance is no guarantee of future results. All rights reserved.

Large caps outperformed small caps in 2025. Value beat growth across both size segments. And lower-profitability companies outperformed higher-profitability ones, which points to a shift toward more cyclical, risk-tolerant leadership.

The takeaway is that factor leadership rotates too. Staying diversified across size, value and profitability matters more than betting on last year's winners.

Volatility is the toll we pay

S&P 500 declines per year, 1928 to 2024

Small pullbacks are common and major declines are rare. A 3% to 5% dip happens roughly seven times a year. A 10% correction shows up about once a year. A true bear market of 20% or more arrives about once every three and a half years.

Volatility is normal. Short-term declines are the cost of earning long-term returns.

Bull markets last longer than you'd think

The current bull market turned three in October and entered its fourth year. That can feel old. Looking at the eleven bull markets since the Second World War, the average lasted more than five years, with a median around 60 months and an average near 67.

Whether this one follows the pattern, nobody knows.

The valuation gap heading into 2026

The following paragraph contains forward-looking statements. Forward-looking statements are not guarantees of future performance and involve assumptions and risks that may cause actual results to differ materially.

Going into 2026 there's a wide valuation gap between asset classes. US growth and large-cap stocks remain expensive on a composite valuation measure, while international, small-cap, mid-cap and value stocks are priced well below their historical averages. On that basis, forward-looking return potential appears stronger outside the most popular US growth segments, which reinforces the case for global diversification and balanced factor exposure rather than concentration in the largest US mega caps. That is an observation about relative valuations, not a prediction about what any of them will return.

Source: Carson Investment Research. All rights reserved.

The portfolios we recommend

Calendar-year returns in Canadian dollars for the funds shown, Series F, net of the funds’ investment management fees and operating expenses and before (gross of) the advisory fee charged on a managed account, which would reduce the returns; see the fee schedule. Shown against each portfolio’s custom benchmark; benchmarks are unmanaged and not available for direct investment. They are not the return of any individual client account; a client’s own return will differ with when they invested, contributions, withdrawals, the advisory fee, and any other funds held. As of December 31, 2025. Past performance is not indicative of, and does not guarantee, future results. Source: Dimensional Fund Advisors Canada ULC.

These are the portfolios I use to help clients reach different goals, managed on an evidence-based investment philosophy. If you're already a client, your own portfolio performance shows on your statement rather than here, since it depends on when you invested and what you hold.