{"id":163328,"date":"2025-06-06T16:00:26","date_gmt":"2025-06-06T16:00:26","guid":{"rendered":"https:\/\/www.europesays.com\/uk\/163328\/"},"modified":"2025-06-06T16:00:26","modified_gmt":"2025-06-06T16:00:26","slug":"portfolio-diversification-is-winning-in-2025","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/uk\/163328\/","title":{"rendered":"Portfolio Diversification Is Winning in 2025"},"content":{"rendered":"

Ivanna Hampton<\/b>: Welcome to Investing Insights. I\u2019m your host, Ivanna Hampton.<\/p>\n

Investing Insights is helping investors navigate market volatility in a new series. Morningstar strategists and authors will deliver timely insights, trends, and tips, and these episodes will regularly pop into your podcast feed.<\/p>\n

This week\u2019s episode focuses on how portfolio diversification is proving its worth in 2025. We have seen significant market turmoil this year. A team of Morningstar researchers have investigated the benefits of creating a diversified portfolio. A tried and true version has helped shield many investors. Morningstar Inc. portfolio strategist Amy Arnott is one of the co-authors of the 2025 Diversification Landscape Report. Thanks for being here, Amy.<\/p>\n

Amy Arnott<\/b>: Thanks, great to be here.<\/p>\n

How Diversification Has Held Up Against Market Volatility in 2025<\/p>\n

Hampton<\/b>: Before we get into the new report, can you talk about the trends that you\u2019ve seen in 2025?<\/p>\n

Arnott<\/b>: Yeah, so obviously we\u2019ve had a lot of volatility in the market, a lot of uncertainty and changes around tariff policy. So because of that, we had\u2014US stocks were actually down 20% from their peak at one point in April, but have now bounced back and are actually in positive territory for the year to date. But as you mentioned in the intro, kind of big picture, we have seen more benefits from portfolio diversification this year. That has definitely been a net positive from a portfolio perspective.<\/p>\n

Why Portfolio Diversification Has Helped in 2025 <\/p>\n

It hasn\u2019t been a panacea, but it has generally worked in investors\u2019 favor.<\/p>\n

\"Collage<\/a>Which Asset Classes Have Been Strong Diversifiers in 2025?<\/p>\n

Hampton<\/b>: And which asset classes have held up so far this year?<\/p>\n

Arnott<\/b>: Yeah, there are a few different things. So gold has definitely done extremely well. It\u2019s up about 30% so far this year through the beginning of June. That\u2019s been driven by a lot of central bank buying, central banks trying to diversify their reserves beyond the US dollar, as well as other investors looking for more of a safe haven asset. Other commodities have also done relatively well overall. Stocks outside of the US have done much better than those in the US. Then investment-grade bonds overall have been a net positive. Although if you\u2019re talking about longer-duration bonds, there has been a lot of volatility there and it\u2019s been a tougher environment.<\/p>\n

Which Asset Classes Have Struggled as Diversifiers?<\/p>\n

Hampton<\/b>: And which ones have struggled?<\/p>\n

Arnott<\/b>: Yeah, so US stocks, as I mentioned, have experienced a lot of turmoil so far this year, growth stocks in particular, and then long-term Treasuries. We\u2019ve actually, even though they are usually very good at diversifying a portfolio, we\u2019ve actually seen a few days when stocks were down, but Treasury bond prices were down at the same time, which is relatively unusual.<\/p>\n

3 Assets That Might Not Diversify as Well as You Think <\/p>\n

Real estate, high-yield bonds, and cryptocurrency don\u2019t always live up to their reputation as portfolio diversifiers.<\/p>\n

\"Illustration<\/a>How Have US vs. Non-US Stocks Performed in 2025?<\/p>\n

Hampton<\/b>: There\u2019s a growing consensus that US investors should look overseas for opportunities. Talk about what you found when you compared US stocks to non-US stocks this year.<\/p>\n

Arnott<\/b>: There\u2019s been a pretty big performance gap, and non-US stocks have actually performed much better. So looking at the year to date through the beginning of June, non-US stocks have gained about 12% versus a 2% gain for US stocks. That has actually been a pretty major reversal from the trends that we saw over the past 10 or 15 years through the end of 2024 when US stocks were in the lead by a pretty wide margin for most of that period. So the outperformance for international stocks this year has partly been driven by currency trends where we\u2019ve seen the US dollar has lost about 8% of its value, which has been a positive if you\u2019re a US-based investor investing in international stocks, you get a benefit when you translate those returns back into US dollars. And then the other positive factor is international stocks headed into 2025 with much lower valuations, which was also a positive.<\/p>\n

Why Holding Assets Outside the US Dollar Has Paid Off in 2025 <\/p>\n

As the dollar weakens, currency is key for international stock exposure.<\/p>\n

\"Collage<\/a>Can Investors Still Turn to Fixed Income During Market Volatility?<\/p>\n

Hampton<\/b>: Now, bonds partially shielded investors against some losses this year, but US Treasury yields also spiked. How should investors think about fixed income?<\/p>\n

Arnott<\/b>: Yeah, so I think, there\u2019s been some chatter about whether US Treasuries should still be considered a safe asset and are they going to be able to fulfill their traditional role as buffers against volatility in the equity market. So we\u2019ve seen a few bobbles here and there and some questions about the high level of spending in the US and the large deficit, whether spending levels are sustainable and what that means for the stability of US Treasuries. I think overall, if you\u2019re investing in investment-grade bonds, they can still function pretty well as ways to reduce your portfolio\u2019s volatility. I think the main thing to be aware of is duration risk and if you are investing in 30-year Treasuries, there\u2019s definitely a much higher level of volatility that\u2019s going to come along with that. For the average investor, for your bond exposure, I think you want to be sticking with intermediate-term or even short-term bonds, depending on your time horizon.<\/p>\n

For Investors Who Can Get Beyond Headline Risk, Opportunity Beckons in Bonds <\/p>\n

The fixed-income market holds appeal if you understand its nuances.<\/p>\n

\"Collage<\/a>US Treasuries Sell Off as Trade War Calls Haven Status Into Question <\/p>\n

More investors are seeking shelter in German government bonds, cash.<\/p>\n

\"Illustration<\/a>How Correlations Between Asset Classes Is Key to Diversification<\/p>\n

Hampton<\/b>: Let\u2019s shift to the new diversification report. It focuses on data through the end of 2024. What did you and your team set out to discover?<\/p>\n

Arnott<\/b>: We wanted to take a really broad view of performance across different asset classes, and a lot of the report focuses on looking at correlations between asset classes and how those correlation patterns have shifted over time. We also looked into what that means for building a diversified portfolio. I think it\u2019s a way for investors and advisors to really think about which assets are best or worst from a diversification standpoint and what types of assets they might want to include in a portfolio.<\/p>\n

Read the full report: Diversification Landscape: Building Diversified Portfolios <\/p>\n

Last year, a 60\/40 portfolio performed better than a diversified portfolio. What does it mean to diversify your portfolio?<\/p>\n

\"Illustration<\/a>60\/40 Portfolio vs. Diversified Portfolio<\/p>\n

Hampton<\/b>: The 60\/40 strategy is one of two main portfolios studied in the report. Can you describe the other portfolio and how you chose the asset mix of it?<\/p>\n

Arnott<\/b>: So for the 60\/40, we used a very basic mix of US stocks and investment-grade bonds, and what we call the \u201cdiversified\u201d portfolio includes a much broader range of asset classes, so 11 different assets in total. And the idea was to provide kind of a point of comparison for that basic mix of stocks and bonds. So for the diversified version, we also include a lot of other assets that could be used in a portfolio. So things like international stocks, commodities, real estate, gold, high-yield bonds, etc.<\/p>\n

Why the 60\/40 Portfolio Outperformed in the Long Term<\/p>\n

Hampton<\/b>: And you\u2019ve written that the plain-vanilla portfolio that you just mentioned, 60% stocks, 40% investment-grade bonds, paid off. How so? Because it was over a longer-term periods, correct?<\/p>\n

Arnott<\/b>: Right. So we looked at performance over different 10-year periods going back to 1976 and found that if you look at risk-adjusted returns, the 60\/40 portfolio actually performed better than a 100% stock portfolio about 80% of the time in those 10-year periods between 1976 and 2024.<\/p>\n

Watch more from Investing Insights’ Market Volatility series. The Best Ways to Diversify Your Portfolio During Market Volatility<\/p>\n

Hampton<\/b>: And you looked at portfolio diversification from many other angles, and I\u2019m going to look at my notes because I want to list them off correctly. The list includes US versus international, sector, investment style, and factors. Are there any areas that stand out as being particularly good when it comes from a portfolio diversification standpoint?<\/p>\n

Arnott<\/b>: Yeah, I think one asset that really stands out is cash. And cash obviously is not the best way to invest for long-term growth, but it does actually have a low correlation with stocks and obviously tends to hold up much better when stocks are down or during periods of equity market volatility. As I mentioned earlier, investment-grade bonds also usually are fairly strong diversifiers against equity market risk, and a couple of other areas I would point to would be commodities, which have historically had very low correlations with US stocks and other major asset classes, gold, and then international stocks have also been fairly good diversifiers, although we have seen correlations trend up.<\/p>\n

For Diversification From Stocks, Cash Has Made a Good Case for Itself <\/p>\n

In our latest diversification research, cash looked even better than Treasury bonds as equity ballast.<\/p>\n

\"Illustration<\/a>What Hasn\u2019t Held Up as Portfolio Diversifiers?<\/p>\n

Hampton<\/b>: On the flip side, are there any areas that you think are overrated as portfolio diversifiers?<\/p>\n

Arnott<\/b>: Yeah, I think one area I would point to would be high-yield bonds, or junk bonds. And because they are so subject to credit risk and the fortunes of the individual company that they\u2019re issued by, they actually tend to move more in line with stocks than people might expect. Real estate and real estate investment trusts, I think, is another area that a lot of people often tout for diversification, but we\u2019ve also seen a pretty large increase in correlations between real estate and other types of stocks over time.<\/p>\n

A couple of other areas would be private equity and private credit. They can show different performance patterns, mainly because they\u2019re much less liquid than public equity and public debt. But at the end of the day, you\u2019re still getting equity and credit exposure. It\u2019s just in a different format. So the overall risk profile may not be that different over time. And then I would also point to cryptocurrency, which has historically had very low correlation with other asset classes, but we have seen correlations increase over time, and the volatility of bitcoin, ethereum, and other cryptocurrencies has been so high that that almost overshadows the diversification benefits.<\/p>\n

Check out Amy Arnott’s series on portfolio basics: How Tough Macro Environments Affect Diversification Patterns<\/p>\n

Hampton<\/b>: And how do diversification trends typically change during different macro environments like times of high inflation, rising interest rates, or lower economic growth?<\/p>\n

Arnott<\/b>: Yeah, that\u2019s a great question. And we do have a section of the paper that looks at diversification patterns during those different types of macro environments. So if you look at periods of rising interest rates or periods of high inflation, what we see is, typically what happens is the correlation between stocks and bonds increases, and that\u2019s the pattern we\u2019ve seen over the past few years when previously the stock\/bond correlation was negative, and we saw that correlation coefficient flip into positive territory. If you\u2019re in an environment where interest rates are rising or inflation is higher than average, typically you get less of a diversification benefit from bonds. In periods of weaker economic growth, on the other hand, bonds have historically performed very well as portfolio diversifiers.<\/p>\n

What Higher Inflation Means for Stock\/Bond Correlations <\/p>\n

Key lessons for investors incorporating bonds into their portfolios.<\/p>\n

\"Collage<\/a>Key Takeaways<\/p>\n

Hampton<\/b>: Are there any other important takeaways for us to remember, Amy?<\/p>\n

Arnott<\/b>: From a big picture perspective, I think one key takeaway from the report is diversification is a good thing, which might seem like an obvious point, but I think it often gets lost, especially during very strong market environments where there\u2019s often a tendency to want to maximize your exposure to whatever asset class is performing best. Second takeaway is that regimes are important. So, as we just talked about, if you\u2019re in a period when interest rates are rising or inflation is above average, you\u2019re typically not going to get as much of a diversification benefit from bonds.<\/p>\n

Then finally, I think another important takeaway is diversification doesn\u2019t have to be complicated. I think a lot of people, when they hear about diversification, they assume more is always better. But as we have seen by the strong performance of the 60\/40 portfolio over time, you don\u2019t necessarily need to add every single asset class. Even if you have a fairly simple approach of just building a portfolio focused on US stocks, international stocks, and investment-grade bonds, that can take you pretty far from a diversification standpoint.<\/p>\n

Hampton<\/b>: Amy, thank you for sharing this important research with us and for coming to the table today.<\/p>\n

Arnott<\/b>: Thanks. Great to be here.<\/p>\n

Hampton<\/b>: That wraps up this week\u2019s episode. Before we sign off, we have a correction to make concerning last week\u2019s episode. A section about companies included on a DividendInvestor\u2019s DividendGrowers list and a follow-up question about companies that weren\u2019t included was inadvertently cut during production. Last week\u2019s episode has been updated to restore this information, so please check it out.<\/p>\n

Thanks for watching and making this show part of your day. Subscribe to Morningstar\u2019s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I\u2019m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.<\/p>\n

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