Diversification is one of the tenets of successful investing. There’s an oft-quoted research study that was conducted a couple decades ago that found that more than 90% of the variability of returns is determined by one’s asset allocation.
In layman’s terms, investing success doesn’t have to include picking the next Nvidia or trying to time the stock market. Instead, you can dial in your unique parameters (risk tolerance, time horizon, etc.) up front, construct the optimal portfolio based on those parameters, and make small course corrections along the way.
A rule of thumb for a balanced portfolio calls for a roughly 60/40 stock/bond split. This assumes that stocks and bonds perform differently in given scenarios. In reality, that is sometimes but not always (think 2022) true.
Drill down further
More importantly, not all stocks behave the same, nor are all bonds identical. There are major differences between large-capitalization (large-cap) and small-cap stocks, between stocks that are driven by above-average growth prospects or are considered to be undervalued (worth more than they’ve been priced by the market). And that’s just within the U.S. stock market.
Also consider non-U.S. developed market and emerging market stocks. Drill down further and you’ll see divergences among economic sectors, within and outside of the U.S. And between international value and growth stocks as well as large-cap and small-cap non-U.S. stocks.
Let’s assume that you have 60% of your portfolio allocated to an S&P 500 Index fund. That might sound diversified (other than ignoring non-U.S. stocks). You’re essentially holding portions of stock in 500 different U.S. companies. But look deeper to see just how diversified your investments actually are. Examine the top 10 holdings to see how much that fund holds in each individual stock.
Major U.S. stock indexes are concentrated
A New York Times column in February, “Your ‘Safe’ Stock Funds May Be Riskier Than You Think,” reported that Fidelity Investments sent letters to shareholders to inform them that two of their major index funds, Fidelity 500 Fund and Fidelity Total Market Fund, are now considered to be “non-diversified funds.” Other investment firms have taken similar action.
That’s because these broad index funds are now dominated by a few giants – Nvidia, Microsoft, Amazon, Alphabet (Google), Apple, Meta (Facebook) and Tesla. The top 10 holdings of the Fidelity 500 Index Fund (which also includes Broadcom, Berkshire Hathaway, and a second class of shares of Alphabet) make up 38.4% of the fund. Nvidia, Apple, Microsoft, and Alphabet each comprise more than 5% of the fund. That’s not a whole lot of diversification.
U.S. stocks have trailed non-U.S. stocks
Without promoting performance chasing, note that the S&P 500 Index, which gained 18% in 2025, badly trailed the broad international stock indexes. The developed market, represented by the MSCI EAFE Index, and the emerging market, (MSCI EM Index), gained roughly 32% and 34%, respectively, almost double the S&P 500’s return, as reported by CNBC.
Bonds have enormous range
Let’s be sure not to neglect bonds. There’s an enormous range between short-term and long-term government or corporate bonds, from U.S. Treasuries to government agencies to asset-backed and mortgage-backed securities, and from investment grade to high yield and emerging market bonds. Diverse bond allocation can regulate your exposure to credit risk as well as duration risk (sensitivity to interest rate movements).
Aim for low correlation
Diversification means (cliché warning) “not having all your eggs in one basket.” The key to achieving diversification is to own low-correlating assets. When two assets tend to perform independently or opposite of one another, they are said to have low correlation or no correlation. That can reduce the volatility of your portfolio.
So rather than thinking in terms of a 60/40 split of stocks and bonds, delve deeper and more broadly into diverse geographies, sectors, industries, and cap/style segments. Also, consider allocating a modest amount to alternative assets. These non-stock/bond investments often behave differently and can include real estate and commodities like gold.
Metals can be precious
Speaking of gold, a column I wrote last spring warned that while you shouldn’t jump on a bandwagon for a high-flying investment, such as gold, it advocated having some exposure. On February 28, 2025, the price of an ounce of gold was $2,848. On February 27, 2026, it stood at $5,270. That’s a healthy 85% return in one year.
Once again, I am not advocating that anyone go “all in” on gold, but it can be quite the effective portfolio diversifier.
Wrap-up
Ultimately, true diversification requires looking far beyond a simple 60/40 split or a standard index fund. As market dynamics shift and once-reliable "safe" funds become increasingly concentrated in a handful of tech giants, the need for a more nuanced approach is clear. By intentionally spreading your capital across diverse geographies, varied bond durations, and alternative assets like gold, you can build a resilient portfolio designed to weather volatility. Successful investing isn't about perfectly timing the market or chasing the latest high-flyer; it’s about creating a balanced, low-correlation strategy that aligns with your long-term goals and keeps you prepared for whatever the global economy brings next.