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It’s been a challenging time for Canadian investors, as the trade war launched by US President Donald Trump has rocked markets. With the news out of Washington, this volatility could persist, as tariffs and other significant geopolitical swings could continue for years to come.
Especially given the kind of uncertainty hitting the Canadian economy, one may have an instinct to retreat from or even pull out of the stock market. But this is precisely when investors need to keep cool. “It’s really important to stay focused on the longer term and discipline to whatever financial plan you have in place,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Investment Management. “The risk is overreacting to the minute-by-minute short-term headlines that keep coming out, which are driving the elevated volatility we’re seeing. Overreaction is always going to cost people in the long run.”
Pappalardo has three other key themes for investors to keep in mind:
Stay diversifiedWatch valuationsTurn risks into opportunities
Here’s a closer look at each of these tips.
Stay Focused on a Long-Term Diversification Plan
Diversification is critical to spread risk across multiple factors and smooth out the short-term bumps of market volatility. “Since timing market swings is nearly impossible, maintaining diversification over the long term is critical to both capturing upside and minimizing downside,” Pappalardo says.
When confronted with a portfolio in the red and high uncertainty in the market, it’s tempting to pull out of investments that are getting hit hard. But Pappalardo insists that sticking to a plan is critical.
One way to stay the course is to diversify one’s portfolio through investments with different patterns of behavior, which can help cushion any short-term selloff. Pappalardo notes that a traditional blend of 60% stocks and 40% equity bonds (often simply called a 60/40 portfolio) is holding up well this year, despite the elevated volatility and market selloff, because the fixed-income component has rallied.
For example, the Morningstar Moderate Target Risk Index, which tracks a mix of 60% global stocks and 40% bonds, is up 1.3% in 2025 in USD terms. Meanwhile, the Morningstar US Market Index is down 5%, and the Morningstar Canada Index is down 1% in Canadian dollar terms.
Diversification is important within asset classes as well. For the last several years, portfolios concentrated in mega-cap, large-cap, high-tech, and/or high-growth stocks would have done very well. While that’s good for investors, unless a portfolio is rebalanced by cutting back on the winners and buying the laggards, those stocks would have become oversized portions. Investors who maintained that outsized exposure to those high-end names would suffer more this year.
“To phrase this in terms of a strategic thought, it’s playing offense and defense,” Pappalardo says. This doesn’t call for giving up exposure to those companies. Instead, what’s needed is “pairing that exposure with some more defensive positioning, whether that’s fixed income in the extreme, or even within equities. Sectors like healthcare or consumer staples have held up much better this year than those highflyer growth stocks.”
Keep an Eye on Valuations
Valuations are important drivers of stock market volatility (and long-term returns). Expensive stocks are more likely to have steep declines when sentiment turns negative. “By looking through a lens of valuation, investors can clear the blurriness of short-term price action, which is especially important during periods of high volatility,” he says. “Diversification is critical to spread risk across multiple factors. Correct valuation is quite difficult to define, and opinions across investors and analysts will vary greatly, but it is a useful and necessary point of view to establish when making investment decisions.”
Pappalardo notes that US stock sectors like consumer staples and healthcare have held up better in recent weeks. Going into the selloff, their valuations weren’t as stretched as growth sectors, with technology being a prime example. In addition, those sectors are less economically sensitive, so they came into the year with more attractive valuations than some other stocks.
Pappalardo also encourages investors to seek broader exposures in their portfolios: “Non-traditional financial assets in a portfolio mix make a lot of sense because they’re designed to disassociate their performance from the stock market a little. It’s a way that investors can still generate some return that’s independent or noncorrelated with traditional financial assets like stocks and bonds.”
Turn Risks Into Opportunities
Despite concerns like the potential inflationary impact of tariffs and the escalating trade war, the risks for investors come with opportunities. “A lot of the short-term volatility is a long-term opportunity,” Pappalardo says “It lets investors deploy new capital at more attractive valuations, or shift their portfolio allocations to sell things that held up better and buy things that have been hit harder.”
Pappalardo thinks investors can best capitalize in this environment by thinking about more active investment management: “Picking well-diversified, disciplined, active investment managers right now makes a lot of sense. That’s true in any period of volatility, but especially now, when the impacts of the headlines driving the market are not equal or broad, but regionalized or sector-specific.”
Of course, Pappalardo says increasing a portfolio hold could be viable for investors who are particularly at risk, but that could also come with a cost.
What’s Next?
The recent market moves could prove short-lived, but the outperformance of recent leaders may not be as extreme. “Those highflyer growth tech stocks will remain very relevant and probably still lead the market, but we expect the gap to narrow,” Pappalardo says. “They’ll be closer in line with the broad market, whereas the last couple years, they were so far ahead that if you didn’t have big allocations to them, you couldn’t keep up with benchmark performance.”
Pappalardo also believes valuation gaps will shrink. The gap between technology and sectors like consumer staples and healthcare has narrowed this year, thanks to the relative buoyancy of the more defensive names.
This could also be true for small-cap and emerging market stocks, which had been lagging developed market large caps. Taking a step back, Pappalardo says, “The most simple advice is: Don’t look at the market every minute of every day, because you’ll drive yourself crazy.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.