I can’t tell you how many times I get asked for hot takes on investments and stocks while at parties or other social gatherings after I say my occupation is an investment strategist. Often times the inquisitive person is trying to get some inside scoop or insight on the next hot stock that will shoot to the moon so they can brag to their friends about their investment acumen and be the star of the next party.
Well, my response to all these questions is a major letdown to all: “Diversify”
In fact – one time the counterparty to the conversation responded: “Wow, you are fun at parties.”
My response: “Wait till I have a few beers, and you may have a different opinion of me, in the meantime, diversify”.
I didn’t talk to that person for the rest of the night as he found a group of people that were much more fun.
Prior to attending social gatherings, I often prepare by thinking of some smart, exciting and even sexy responses – like talking about valuation metrics and how company ABC is isolated from tariffs and that if it reaches $50 it’s going to break through to $75. But without fail I always fall back to the comfortable answer: “Diversify” to the dismay of many.
It’s not just at parties either. As a media guest my response to questions about investment strategies for that particular market environment is, yep you guessed it, “diversify”.
Is Diversification Overrated?
Despite being a prudent investment strategy, diversification has been frustrating and at times over the past few years a losing strategy.
In the aftermath of the credit crisis, diversification has been in the crosshairs of investors. Portfolios that were traditionally considered diversified could not withstand the global reach of the crisis and protections failed when they were needed most. The past decade has proven that simply adding foreign investments to a portfolio does not equal diversification. More recently, diversified portfolios have fallen behind and it’s easy to see why.
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The line between the haves and the have nots has widened. Investors who went “all in” on the “Mag-7” were rewarded, while investors who were diversified across the other 493 stocks of the S&P 500 index were penalized.
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Over the past 20-years through June 2025, Apple has outperformed the S&P 500 index by a cumulative 17,722%. Yet buying SPY was the prudent thing to do.
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U.S. equities (S&P 500 index) have reigned supreme over international equities (MSCI World ex USA index) by over a cumulative 420% during the past 20-years through June 2025.
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Everything fell in 2022 including the perceived safety net of bonds, which experienced their largest drawdowns ever. Not surprising when bond yields were at 1%.
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A globally diversified portfolio produced an annual 7% return compared to the S&P 500 index’s 10.50% annual return over the past 20-years through May 2025.
So, Why Diversify?
As we know markets are cyclical, and we are currently in a very uncertain cycle which benefits diversified investment portfolios. Sure, when earnings are strong, policies are clear, global relations are stable, and macro forces trend favorably, you can benefit from a highly concentrated portfolio in a few investments. However, that is far from the case now as investors are faced with a full list of uncertainties.
Are you looking for help when creating a diversified investment portfolio? Zephyr can help.
While there are times when diversification might be holding your portfolio back, there are times when it helps you gain exposure to top performing investments that you otherwise would’ve missed out on. For example, foreign equities. As Figure 1 shows, the S&P 500 index outperformed the MSCI World ex USA index by a cumulative 158.80% and the Bloomberg U.S. Treasury: 7 – 10 Year index by 246.06% over the past 10 years.
However, that performance has shifted in a big way recently. During the first six months of this year, the MSCI World ex USA index outperformed the S&P 500 index by 13.26% while the Bloomberg Aggregate Index underperformed the S&P 500 index by just 0.86% (Figure 2).
Shifts in market sentiment and performance can happen quickly and you will likely miss the early stages of the rotation if you try to time the market.
Normalization will benefit diversification.
After years of aggressive and historical monetary and fiscal policies following the Great Financial Crisis and Covid-19 pandemic, investors often forget what “normal” is. 1% on 10-Year Treasury yields are not normal, neither are interest rates at zero or a ballooning Federal Reserve balance sheet.
These abnormalities distorted markets, as investors were flush with “free” cash to spend or invest. This cheap money artificially propped up asset prices and inflation which resulted in an increase in asset-class correlations
The normalization of these macro forces, particularly inflation and Treasury yields, will reduce asset class correlations, which will boost the benefits of portfolio diversification. As you can see in the Zephyr graph, correlations between different asset classes and the S&P 500 index typically increase during periods of inflation.
The picture becomes clearer when isolating the relationship between 10-year Treasuries (Bloomberg U.S. Treasury 7-10 Year index) and equities (S&P 500 index). Over the past 30 years the two have had an inverse relationship, as the correlation during that time was a -0.10. However, the negative relationship between 10-year Treasury bonds and U.S. Equities breaks down during times of increased inflation (Table 2). While inflation has been stubborn recently, it’s within shouting distance of the Fed’s target, which is good news for diversification.
Since 2009 there were long periods of time when the 10-year Treasury yield was below 2%. However, the 40-year average yield on 10-year Treasuries is 4.74% while the 20-year average yield is 2.91%. At the time of this writing yields are at 4.38%. While Treasury yields look to be in a “normal” long-term range, real yields are safely in positive territory, inflation is nearing the Fed’s target and the Fed’s balance sheet shrinking, which are all normal and should help remove market distortions.
Create Similar Analysis in Zephyr
Diversification can be boring, especially when someone is searching for the next 10-banger. A sound diversified investment portfolio can help you hedge against being wrong like when that can’t miss stock does miss, which I hate to say will happen. The normalizing of inflation along with a smaller Fed balance sheet and normalized interest rates will help bring diversification back from the dead and maybe the talk of your next social gathering.
Zephyr, is an award-winning asset and wealth management software that offers portfolio construction, proposal generation, advanced analytics, asset allocation, manager screening, risk analysis, portfolio performance and more, transforming multifaceted data into digestible intel.
Ryan Nauman is the Market Strategist at Zephyr, which helps investment professionals make more informed investment decisions on behalf of their clients.
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