Perspectives · Portfolio construction · 2026

Diversification only works if the pieces behave differently

Diversification is the idea that a portfolio need not depend on a single source of return. It works when holdings respond to different things. It fails when they all respond to the same thing, which tends to show itself in a crisis.

The market history in this archive has plenty of examples. In 2022, stocks and bonds fell together as inflation forced rates up. In March 2020, assets that normally behaved differently fell at once as investors sold whatever they could. Correlations between assets are not fixed: they rise when stress is highest.

Real diversification means looking at what drives each holding: interest rates, economic growth, inflation, credit conditions, a single company's results, a commodity price. Two assets in different asset classes can still share one driver. Two assets in the same class can have none in common.

It also has a cost. A diversified portfolio will rarely have the best result in any single year, and some holdings will always be lagging. That is how it is meant to work.

General information only; not investment advice. Read the risk warning.