Ask The Experts - November/December 2025
All answers are provided by 5i Research.ca
Q: I would like to get your opinions on what investors should do given possibly an inevitable market correction. Many portfolios have gone up over 25% this year, which likely is not sustainable. Should we move to bonds? If so, where?
A: Market corrections happen from time to time, but we will note that the broader market (S&P 500) has seen three 20%+ declines in the last five years, which is quite rare. There is a possibility that the next correction could be 'time-based' vs. 'price-based', i.e., a correction similar to 2015, where the market went sideways for a year or so, testing investors' patience, rather than 'price-based' which happens quickly (March 2020 or April 2025), which tests investors' fortitude.
If an investor is preparing for a potential correction, we think bonds is one area that can hold up well, but we prefer positioning a portfolio more conservatively via sector rotation. Defensive sectors (utilities, consumer staples, US healthcare names) tend to outperform in market corrections, whereas cyclical sectors (tech, communications, discretionary, industrials, financials) tend to outperform in bull markets. Thus, we would prefer the approach of positioning one's portfolio 'down the risk curve'.
Q: I saw a video clip of the Parliamentary Budget Officer giving a dire review of the financial health of the country - pretty much saying it is unsustainable unless something is done quickly. Are you recommending any significant changes to individual investors’ portfolios based on these findings? What would happen to stocks if Canada defaulted on its debt?
A: A debt default would be devastating to Canadian stocks, except for commodity and gold stocks. But these have high exposure in Canadian indices, so the TSX index might not get hit so hard, but many stocks would see very large declines in such a case. The Canadian Dollar would decline sharply, of course.
The best protection here is having some gold exposure and having some international diversification. This is one reason we prefer unhedged products - just in case. But currencies everywhere are declining, which is why gold is breaking out to new highs.
Q: I am having trouble with the Return of Capital (ROC) concept in non-registered accounts. It seems like a losing situation, as your adjusted cost base is reduced by the ROC, leaving you to pay or lose a greater amount, even though it is a capital gain and not interest. Also, a ROC is my original capital that I already paid tax on. Isn’t this double taxation? Please explain as simply as possible.
A: Return On Capital (ROC) can be confusing. While it can mean that an investors' own capital is being returned, this is not always the case. It can also be a reflection of accounting treatment at any particular company.
ROC is not taxed in the year received, but lowers the Adjusted Cost Base (ACB) for a security. So it is not double taxed, and actually is more-favourably taxed (for most investors) as a capital transaction.
Watching unit value is important, though, as ETFs with high payouts can certainly see price declines if there is a high ROC component for an extended period of time. Thus, we would certainly look at total returns rather than just yields.
Q: I am nervous about being in a bubble, but I like all the stocks that I own. How can I protect myself against a major correction?
A: Never, in our 40-year career, have we seen a market where there was nothing to worry about. This is the way of the equity market. Keep in mind that investors today are not buying with the expectation of losing money. We have strong earnings and lower interest rates. These can be very powerful influences.
There are hedges available, but most are not very effective. Inverse ETFs are expensive. Short selling costs money and can be risky. Buying put options is way too expensive in most cases.
Our best suggestion is cash. It costs nothing, it earns a bit, and it will never decline, unlike most hedges if one is wrong about their market call.
Investing should be long term, and, since we are at record highs, every single correction so far has been an opportunity to buy and make money. We would, simply, keep cash at a level where one doesn't worry and can stay the course through market gyrations.