Investing in an Uncertain Market

Some years are more memorable than others. It looks like 2025 is shaping up to be one for history books with our federal election and trade tensions with the US. Such developments inevitably feed into the financial markets, fostering an atmosphere of uncertainty.

We’ve seen this and worse before: at the onset of the pandemic in 2020, and during the financial crisis in 2008. However, it's crucial to recognize that uncertainty is not an anomaly in the markets; it is their very nature, particularly during periods of significant change and upheaval. Market uncertainty is not a hurdle to be feared and avoided, but a fundamental characteristic of investing. It is uncertainty that gives rise to risk, and taking on risk is how investors earn potential rewards. Without risk, the concept of reward would not exist. 

The question remains: how does an investor, especially a municipality, navigate this inherent uncertainty? A key part of the answer lies in the principle of diversification: it is better to hold a variety of smaller risks than to be exposed to fewer larger risks. Diversification allows for potential threats to be spread out, thereby reducing the impact of any single negative event on the overall portfolio.

Diversification is the essence of prudent investing and constructing a portfolio with a higher expected return for the level of risk assumed.

With a strategic asset allocation, investors identify fixed ranges for holding various asset classes, sectors, and geographies. This is the cornerstone of sound investment management, especially during times of market turmoil. It provides disciplined investors with a decision-making framework that can guide them.

The first step for investors to build a strategic asset mix is to assess their risk tolerance, investment horizon, and financial goals. Investors then work with experts to align these objectives and goals. The assessment informs both risk and return objectives, and ultimately the strategic asset allocations. By adhering to a thoughtful framework, investors can maintain their focus on long-term objectives and resist the temptation to make impulsive decisions based on short-term market movements. 

Investors who approach the market with a disciplined and informed strategy will be better positioned to weather the storms and capitalize on the opportunities that arise.

Markets are forward-looking and continuously repriced based on changing facts and narratives. Trying to chase or time the markets usually leads to less-than-ideal outcomes, particularly for investors with a long-term horizon. 

So, what does this mean for Ontario municipalities?

By default, municipalities are bound by a ‘legal list’ for investing that is 100% domestic content, but there is an opportunity to diversify and to earn better risk adjusted returns over the longer term. A municipality can declare themselves a ‘Prudent Investor’.

Since 2020, ONE Investment has offered a Prudent Investment Program. It’s a turnkey solution that offers Ontario municipalities, regardless of size, access to far broader investment powers by leveraging the ‘Prudent Investor Standard’ opportunity in the Municipal Act (Section 418.1).

On May 7, PH&N Institutional (our investment management partner) held a webinar to provide an update on current market developments and economic challenges and explore the benefits of a diversified portfolio.

If you have any questions, please contact ONE@oneinvestment.ca.