In today’s market environment, we’re witnessing a powerful wave of FOMO-driven return chasing, a phenomenon where investors, fearful of missing out, pile into trending assets without fully considering the underlying risks. While this behavior can drive short-term gains, it often leads to distortions across asset classes, driving momentum in some areas while speeding up losses in others.

A prime example of this is the recent surge in demand for U.S. corporate bonds, where spreads have sunk to 27-year lows. Investors are accepting increasingly lower compensation for credit risk, driven by a belief that central banks will maintain a supportive stance and that economic conditions will remain benign. However, this compression in spreads leaves little room for error. Any deterioration in credit quality or shift in interest rate expectations could lead to sharp repricing.

Similarly,

artificial intelligence-related equities

have reached all-time highs, fuelled by excitement around transformative technologies. While the long-term potential of AI is undeniable, even industry leaders such as

OpenAI Inc.

’s

Sam Altman

have warned of a bubble forming, as capital floods into the sector at an unsustainable pace. The combination of speculative fervour and higher valuations makes this space particularly vulnerable to a correction if expectations aren’t met.

Managing risk in the AI space

Rather than chasing the most speculative names, we at TriVest Wealth Counsel manage risk by focusing on established companies with diversified exposure to AI, such as Alphabet Inc. and Apple Inc. These companies are not only leaders in AI innovation but also have strong balance sheets, robust cash flows, and multiple revenue streams that provide downside protection.

Alphabet is deeply embedded in AI through its Google Cloud platform, DeepMind and integration of AI across its advertising and search businesses. Yet it remains attractively valued compared with pure-play AI startups. Apple, while not an AI-first company, is integrating AI into its ecosystem, from Siri to on-device intelligence, while maintaining its dominance in hardware and services.

This kind of selective exposure allows investors to participate in the AI growth story without taking on the full risk of speculative valuations or unproven business models.

Alternative strategies to corporate bonds

Some investors may be tempted to sell their

corporate bonds

and move into private debt markets, attracted by higher yields. This can be a decent trade but you need to be careful about which segment you are investing in and the manager overseeing the portfolio to ensure yields are supported by fundamentals.

For those segments that are underperforming, there is the risk that investors grow impatient and move back into public markets where performance has been stronger. This shift is not without consequence, particularly if unitholder redemptions accelerate, forcing funds to gate withdrawals or sell assets at distressed prices.

We believe there are better alternatives that offer competitive returns without sacrificing liquidity or transparency. For example, we’re currently investing in 100 per cent principal-protected structured notes with an annual autocall yield of 7.5 per cent. These notes provide downside protection while offering a very attractive yield, especially when compared to the FTSE Canada All Corporate Bond index, which currently yields about four per cent.

Another option we like is the BMO Strategic Fixed Income Yield Fund, which offers a yield of 7.7 per cent (six per cent after the cost of hedging) and can be easily sold if funds are required. This fund provides exposure to a diversified mix of fixed income investment strategies while maintaining daily liquidity, which is an important feature in today’s uncertain environment.

For those seeking a combination of dividend yield and growth potential, we suggest looking closer to home. By reallocating some funds back into Canadian dollars, investors can take advantage of opportunities in sectors such as utilities, which offer stability and income. The iShares S&P/TSX Capped Utilities index ETF is a great example. It holds solid companies such as Fortis Inc., Emera Inc., and Brookfield Infrastructure Partners, and currently has a dividend yield of about four per cent. These companies operate in essential industries with predictable cash flows, making them attractive in a market where volatility is rising.

Staying disciplined

Ultimately, the key to navigating today’s market is to remain disciplined and avoid chasing returns at the expense of risk management. Liquidity, transparency and valuation discipline should remain central to any investment strategy. While the allure of corporate bonds, private equity and

high-flying tech stocks

may be strong, the risks, especially in terms of upside potential and downside protection, are real and growing.

  • Investors and car buyers take note: ‘If it’s hard to buy, it’s going to be hard to sell’
  • The growing risk hidden in the S&P 500 and what investors can do about it

By sticking to a well-defined and diversified investment plan, we can better manage risk, respond to changing market conditions and position portfolios for long-term success. In a world increasingly driven by emotion and momentum, that kind of clarity and control is more valuable than ever.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

_____________________________________________________________

If you like this story,
sign up for
the FP Investor Newsletter.