The high-risk investing strategy that puts all its potatoes in one basket

The Canadian stock market gained 29.9 per cent over the 12 months to the end of August, making it the place to be as it outpaced both international stocks and the U.S. market over the period. The momentum-based Hot Potato portfolio benefited from the Canadian surge because it moved into Canadian stocks at the end of March, 2025. The recent gains helped push the portfolio's long-term average annual growth rate to 13.6 per cent over the period from the end of January, 1994 through to the end of August, 2026. The portfolio takes an admittedly aggressive approach to investing. It invests all of its money in the single major asset class – from Canadian bonds, Canadian stocks, U.S. stocks, or international stocks – that performed the best over the prior 12 months. (All of the returns herein use month-end data from Bloomberg or S&P Global Market Intelligence expressed in Canadian dollars. The asset-class, or market, returns reflect those of the S&P Canada Aggregate Bond Index, the S&P/TSX Composite Index, the S&P 500, and the MSCI EAFE Index. The portfolios are rebalanced monthly and include reinvested distributions but not fees, taxes, commissions or other trading costs.) The Hot Potato portfolio might be viewed as a hyper-charged version of the more conservative Passive Potato portfolio. The Passive Potato gained an average of 8.1 per cent annually from the end of January, 1994, through to the end of August, 2026, by dividing its money equally between the four market indexes used by the Hot Potato. The accompanying graph shows the average annual returns for both portfolios over rolling 10-year periods. The Passive Potato portfolio slogged through a miserable period in the early 2000s with average annual gains of just 0.8 per cent over the 10 years through to the end June, 2010, which was bookended by two big stock-market downturns. Even worse, the poor result doesn't take inflation into account and doing so would have made matters worse. On the other hand, the Hot Potato portfolio gained an average of 6.9 per cent annually over the same 10-year period despite the downturns. The long-term gains of the Hot Potato have been grand but think twice before adopting it because it can be volatile. After all, it usually invests everything in one of the three stock-market indexes. Mind you, bonds also disappointed in recent years when interest rates bounced off their historic lows. For instance, the Hot Potato portfolio plunged 31 per cent in the wake of the internet bubble with a precipitous decline over the course of just eight months after hitting a high at the end of August, 2000. The Passive Portfolio fell 30 per cent in the same downturn, but it took 31 months for it to reach bottom. The Hot Potato went on to recover and climb to a new high in early 2005, while the Passive Potato advanced to a new high in the fall of 2005. The Hot Potato's active approach requires attention each month and it swapped asset classes a little less than twice a year, on average, over the past three decades. As one might expect, some of its trades were not beneficial. That is, sometimes it zigged when it should have zagged – or when it shouldn't have done anything at all. The frequent trading can also trigger capital-gains taxes in taxable accounts with a fair degree of regularity. Those who adopt the Hot Potato should be mindful of its potential tax consequences. While the Hot Potato is not suitable for new investors or those who don't want to pay much attention to their portfolios, the Passive Potato portfolio is easier to follow and can be modified to better reflect the risk tolerances of individual investors. Passive investors can also opt for an all-in-one low-cost balanced exchange traded fund (ETF) that tracks a reasonably similar portfolio. For instance, The Globe's ETF guide for 2026 pointed to the Bank of Montreal's Balanced ETF (ZBAL-T) as a good option for passive investors but be aware that it holds about 40 per cent of its assets in bonds. The Hot Potato will stick with Canadian stocks in September because our market was the best performing of the four asset classes over the 12 months to the end of August, 2026. It's been fun to follow the Hot Potato in recent months as it roots for the home team. With a little luck, both portfolios will continue to generate reasonable returns over the long term. Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.