Jun 4, 2026
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For most of the past 15 years, a simpler investment portfolio felt like a genius plan. Put 60% in stocks and 40% in bonds, rebalance once a year and let compounding do the heavy lifting.
Then 2025 happened — and a more diversified mix beat the classic 60/40 strategy by 5%, the biggest margin since 2009, with most registered accounts not holding nearly enough assets.
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If your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) is built entirely around a simple balanced fund or a single domestic stock index, you may have left meaningful returns on the table last year. Here’s what the data shows — and what Canadian investors can do about it.
What was actually in the winning portfolio
Morningstar portfolio strategist Amy Arnott tested an 11-asset portfolio against the classic 60/40 mix as part of the firm’s 2026 Diversification Landscape report. The diversified portfolio was spread across various asset classes, including:
- 20% in large-cap global stocks
- 10% each in developed international stocks; emerging market stocks; government bonds; core investment-grade bonds; global bonds; high-yield bonds
- 5% each in small-cap stocks; commodities; gold; real estate investment trusts (REITs)
Arnott found the diversified portfolio outperformed the standard 60/40 portfolio by just over 5% by the end of 2025 — returning 18.3% in 2025, compared to 13.3% for a basic 60/40 mix of stocks and investment-grade bonds. Arnott also found that the advantages offered in the diversified portfolio could continue into 2026.
However, investors should realize that the additional returns created through the diversified portfolio were strong due to prolonged market volatility. During more stable times — and over a longer time horizon — the standard 60/40 portfolio allocation generated better risk-adjusted returns than the diversified version. In other words, diversification wins during volatile or uncertain markets.
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3 forces that made diversification pay off in 2025
According to Morningstar, three interconnected forces drove last year’s result: A weakening U.S. dollar, more attractive international valuations and a near 70% surge in gold. All three were amplified by rising geopolitical uncertainty and a broader global shift away from U.S.-centric assets.
First, international stocks — the assets a classic 60/40 portfolio typically ignores — had a breakout year. Developed markets outside the U.S. jumped 32.2%, while U.S. stocks gained 17.4%.
The U.S. dollar weakened 10% against other major currencies in 2025. The Canadian dollar gained against the U.S. dollar, but lost ground against the euro, yen and British pound. Canadians holding international assets denominated in those currencies received a double tailwind — gains in the local currency of those markets, and gains when those returns were converted back to Canadian dollars.
Meanwhile, gold surged nearly 70% for the year, driven by central bank buying and investors seeking a safe-haven asset amid rising geopolitical tensions.
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“People are buying it because they think it’s going to keep going up,” Arnott told USA Today. “And that’s definitely what we saw in 2025.”
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Why diversification doesn’t always win
From 2009 to 2024, the simple 60/40 portfolio earned its reputation. U.S. stocks delivered a 14.5% annualized return over that period, compared to just 7.6% annualized for international equities, according to Morningstar. Holding foreign stocks that couldn’t keep pace with North American markets dragged down the average return of diversified portfolios.
There’s also a structural challenge: In severe market crashes, assets that are supposed to diversify your risk can fall together, eliminating the very protection you were counting on.
What Morningstar recommends for investors right now
So what should investors do? Arnott’s advice is to keep things simple, even when diversifying.
She recommends three core asset classes: global stocks, both domestic and international, and investment-grade bonds. Arnott told CNBC that international stock valuations still look more attractive than U.S. stocks. On the bond side, she recommends sticking to short- to intermediate-term maturities.
“In addition, a small commodity exposure could make sense if inflation continues to run above the 2% target,” she said.
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Furthermore, Arnott advises against investing too much in gold, cryptocurrency or newer asset classes like private equity and private credit, because the risks may outweigh the benefits.
“Even if you have a fairly simple approach of just building a portfolio focused on [domestic] stocks, international stocks, and investment-grade bonds, that can take you pretty far from a diversification standpoint,” she said.
How Canadian investors can apply this advice
The S&P 500 index funds that dominate many Canadian registered accounts give investors zero international exposure. But Canadian-listed exchange-traded funds (ETFs) on the Toronto Stock Exchange (TSX) make it straightforward to add that exposure.
For broad international diversification, two commonly used options are:
- The iShares Core MSCI All Country World ex Canada ETF (XAW) holds both U.S. and international stocks from developed and emerging markets — giving Canadian investors global exposure in a single fund while excluding Canadian equities, which most Canadians already hold through domestic funds or their employer pension.
- The Vanguard FTSE Developed All Cap ex North America Index ETF (VIU) focuses specifically on developed international markets, including Europe, Japan and Australia — the same markets that surged in 2025 — and has historically traded at lower valuations than North American equities.
Both ETFs are available in Canadian dollars and are commonly held inside RRSPs and TFSAs.
One additional consideration for Canadian investors: Capital gains earned inside a TFSA are entirely tax-free, and gains inside an RRSP are tax-deferred until withdrawal. For investors holding international assets in a non-registered account, capital gains are taxed at a 50% inclusion rate in Canada — meaning only half of your capital gain is added to taxable income. This is a meaningful advantage compared to many other jurisdictions and makes it worth reviewing which account holds which assets.
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What to do now: A Canadian investor’s checklist
The Morningstar findings don’t mean you should abandon your current strategy. But they do offer a useful prompt to review your portfolio. Here are four steps Canadian investors can take:
- Check your international exposure. If your RRSP or TFSA is largely Canadian equities and bonds — or purely a U.S. index fund — you had little exposure to the international stocks that outperformed in 2025. Consider whether adding a broadly diversified international ETF like XAW or VIU aligns with your risk tolerance.
- Review your bond duration. Analysts recommend short- to intermediate-term maturities for bond holdings (11). Long-duration bonds remain more sensitive to interest rate changes, which matters in the current environment.
- Consider a small commodity allocation. A modest exposure to commodities — through a commodity ETF or a diversified asset allocation fund that includes commodities — may offer a hedge if inflation stays elevated.
- Be cautious about chasing last year’s winners. Gold surged 70% in 2025. Buying heavily into any asset after a dramatic run-up introduces timing risk. Arnott specifically warns against over-allocating to gold, crypto or private markets.
Arnott’s research shows the 60/40 portfolio isn’t dead — rather, it works best with a longer time horizon — and offers an opportunity to strategically add hedges during volatile markets. This means adding diversification to your investment portfolio, including gold, cryptocurrency, international stocks or real asset exposure doesn’t require complexity, but intention.
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Godwin Oluponmile is a content specialist, SEO strategist and copywriter with seven years of expertise in finance, Web 3.0, B2B SaaS and technology. His work has been featured in publications such as Entrepreneur, HackerNoon, Blocktelegraph and Benzinga.
