Portfolio diversification had its most decisive victory in several years during 2025’s turbulent but generally bullish market environment. Even as US stocks notched yet another year of above-average returns, non-US stocks fared even better, and gold surged by nearly 70% (all returns in this article are measured on a US dollar basis).
That’s one of the main takeaways from our recently published 2026 Diversification Landscape. In the report, Christine Benz, David Reyna, Jack Shannon, and I take a deep dive into how different asset classes performed in the past couple of years, how correlations have evolved, and what those changes mean for investors and financial advisors trying to build well-diversified portfolios. We also discuss how major asset classes performed during periods of market stress, such as recessions, high inflation, and rising interest rates.
Here are some of the key findings from the report.
1) Diversification Paid Off in 2025
Thanks to last year’s strong but rocky market conditions, our “diversified” test portfolio gained about 18.3% for the year, compared with a 13.3% return for a basic 60/40 portfolio (made up of US stocks and US investment-grade bonds). That 5-percentage-point advantage was the biggest win for portfolio diversification since 2009.
With lower correlations for many of the “diversified” asset classes, the diversified portfolio would have also done a better job reducing risk during 2025, especially during turbulent periods such as the tariff turmoil in the spring and some less extreme market jitters toward the end of the year. As a result, the diversified portfolio finished the year with far better risk-adjusted returns, as measured by the Sharpe ratio, than both the basic 60/40 portfolio and Morningstar US Market Index and Morningstar US Core Bond Index.
How Portfolio Diversification Worked in 2025
2) Global Stocks Have Been Shaking Off Their Previous Slump
After a long period of underperformance, global stocks pulled ahead by a wide margin in 2025, thanks in large part to the dollar’s weakness relative to other major currencies. The Morningstar Global Markets ex-US Index gained 32% for the year, versus an 18% gain for the Morningstar US Market Index.
That followed on the heels of a prolonged slump over most of the period from 2009 through 2024. During that stretch, non-US stocks notched annualized returns of about 7.6%, compared with 14.5% for stocks in the United States.
Ongoing weakness in the US dollar—as well as lower valuations in many non-US markets—are potential tailwinds that could help global diversification remain a net positive. In addition, non-US stocks have shown some signs of delinking from domestic stocks, which is beneficial for investors seeking diversification benefits. Over the three-year period ended in 2025, the Morningstar Global Markets ex-US Index had a correlation of 0.74 with US stocks, down from as high as 0.93 in previous periods. Correlations on stocks from emerging markets—which are generally lower than those from developed markets—have also trended down.
3) Bonds Have Regained Some of Their Status as Portfolio Ballast
The double-digit losses on investment-grade bonds in 2022 are still an open wound, but investors holding fixed-income securities came close to recouping those losses after a strong showing in 2025. Morningstar’s US Core Bond Index posted total returns of about 7% for the full year—its best showing since 2020. Bonds also held up relatively well amid periods of market turmoil. When stocks dropped about 9% during the first week of April 2025, for example, the bond benchmark gained about 1%. Overall, investment-grade bonds showed positive returns in 21 of the 25 weeks when the Morningstar US Market Index had negative results during 2025.
Correlations between stocks and investment-grade bonds remained elevated over the trailing three-year period but shifted back into negative territory for 2025. Investors who were previously worried that bonds would become less reliable portfolio diversifiers can take some comfort in this return to form. Cash has also continued to stand out as one of the best portfolio diversifiers.
The bond narrative hasn’t been uniformly positive, though. With supply disruptions amid the war in the Middle East, oil and gas prices have spiked in 2026, sparking renewed concerns about inflation and higher yields on longer-term bonds. As long as this situation continues, longer-duration bonds will probably remain more volatile than usual. Retirees who are in drawdown mode—or other investors who don’t want to take on a lot of risk—should consider employing cash and short-term bonds alongside their intermediate- and longer-duration core bond holdings.
4) Not Every ‘Diversified’ Asset Class Is Worth Owning
The basic math of portfolio diversification means that asset classes that don’t move in lockstep with US equities should help reduce risk at the portfolio level. But these benefits can often be overstated.
Take gold, for example. It’s the only major asset class to sport a negative correlation with US stocks over the trailing three-year period, and its nearly 70% runup in 2025 helped offset periodic weakness in stocks. But over longer periods, it has also been prone to extreme volatility and periodic drawdowns. Gold has actually been more volatile than US stocks over the past three years, despite its reputation as a safe haven.
Cryptocurrency has followed a similar pattern, where low correlations have been overshadowed by extreme volatility and periodic downturns.
Private equity and private credit, meanwhile, are increasingly being touted for their potential diversification benefits. On paper, they appear to boast low correlations simply because their underlying holdings don’t trade as often. But over longer periods, they may not provide consistent diversification value. For instance, private equity buyout strategies are close siblings to small-cap value investing, while venture capital is similar to small-cap growth investing. While the volatility will look different between the public and private options, they are effectively taking on much of the same risks.
5) Keep It Simple
Despite the recent strong win for diversified portfolios in 2025, the basic 60/40 portfolio has been tough to beat over longer periods. It came out ahead of our diversified benchmark (for both returns and risk-adjusted returns) over the trailing 20-year period in 2025. The 60/40 portfolio also generated better risk-adjusted returns than an equity-only benchmark in about 80% of the rolling periods going back to 1976.
The enduring (and often prematurely dismissed) strength of the 60/40 portfolio suggests that investors looking to build diversified portfolios don’t necessarily need to venture too far beyond a basic mix of larger-cap stocks and high-quality bonds. In my opinion, most investors need exposure to three core asset classes: US stocks, global stocks, and investment-grade bonds. Some investors might want to add Treasury Inflation-Protected Securities—which currently offer attractive yields in real terms—for a portion of the latter. Cash is also essential for an emergency fund and other short-term spending needs. But anything beyond that is optional.
Webinar note: My colleagues and I will be discussing these findings and other diversification strategies in an upcoming webinar on May 14, 2026.
