By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panel consensus is that the 11-asset diversification strategy's 2025 outperformance may not be sustainable or repeatable due to its reliance on cyclical tailwinds and potential risks such as liquidity traps, tax drag, and correlation spikes in a crisis. A simpler, tax-efficient 60/40 index strategy may be more resilient.
Risk: Liquidity trap risk during USD strength reversals or crises, which could erase the 2025 alpha and crush tax-adjusted returns.
Opportunity: None explicitly stated.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
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For most of the past 15 years, the simple portfolio looked like a genius plan. Just put 60% in U.S. stocks, 40% in bonds and rebalance once a year.
Then 2025 happened — and a more diversified mix beat the simple portfolio by 5%, the biggest margin since 2009, with assets most retirement accounts don’t have enough of (1).
This is one of the key findings of Morningstar’s 2026 Diversification Landscape report.
Morningstar tested an 11-asset portfolio against the classic 60/40 mix and discovered that the diversified portfolio not only beat the old‑school mix by 5% last year, but continues to outperform in 2026, ahead of the simple portfolio by 3% as of mid-April, reports CNBC (2).
Still, as Morningstar reveals, over the past 20 years, the plain‑vanilla 60/40 wins on risk‑adjusted returns.
In other words, diversification isn’t always better. Here’s why 2025 was different, and what that means for how you build your portfolio right now.
Morningstar tested a diversified portfolio spread across 11 asset classes in specific proportions:
- 20% in large-cap U.S. stocks
- 10% each in developed international stocks; emerging market stocks; U.S. Treasuries; U.S. core bonds; global bonds; high-yield bonds
- 5% each in U.S. small-cap stocks; commodities; gold; real estate investment trusts (REITs)
The diversified portfolio returned 18.3% in 2025, compared to 13.3% for a basic 60/40 mix of U.S. stocks and investment-grade bonds.
According to Morningstar, three things drove 2025’s result: a weakening dollar, more attractive international valuations and gold’s surge. All three are connected to rising geopolitical uncertainty and global investors diversifying away from U.S.-centric assets.
First, international stocks — the ones the classic 60/40 portfolio usually ignores — had a breakout year. As tracked by Morningstar Global Markets ex‑US Index, markets outside the U.S. jumped 32%, while U.S. stocks only gained around 18%.
A big part of that was that the U.S. dollar weakened over 9% against other major currencies (3). For U.S. investors, if your foreign stocks rise in local‑currency terms, the falling dollar gives you an extra boost when you convert those foreign stock gains back into U.S. dollars.
Meanwhile, gold surged nearly 70% for the year, driven by central bank buying and investors seeking a safe-haven asset amid rising geopolitical tensions, reports Morningstar.
“People are buying it because they think it’s going to keep going up,” Morningstar portfolio strategist Amy Arnott told USA Today (4). “And that’s definitely what we saw in 2025.”
Still, diversified portfolios don’t always outperform. In fact, Morningstar found that over 20 years, the 60/40 portfolio generated better risk-adjusted returns than the diversified version.
From 2009 to 2024, U.S. stocks dominated with a 14.5% annualized return, compared to a 7.6% annualized return for international equities. Holding foreign stocks that didn’t keep up with U.S. equities dragged the average return of diversified portfolios down.
Another challenge with diversified portfolios is that in big market crashes, diversified assets can suddenly fall, so the protection you counted on can vanish when you need it.
Read More: Here’s the average income of Americans by age in 2026. Are you falling behind?
So what should investors do right now? Arnott advises that investors keep things simple, even when diversifying their portfolio.
She recommends three core asset classes: U.S. stocks, international stocks and investment-grade bonds.
Arnott told CNBC that international stock valuations still look more attractive than U.S. stocks. On the bond side, she recommends sticking to short- to intermediate-term maturities.
In addition, she noted that a small commodity exposure could make sense if inflation continues to run above the 2% target.
She advises against investing too much in gold, cryptocurrency or newer asset classes like private equity and private credit because the risks may outweigh the benefits.
A standard S&P 500 index fund gives you zero international exposure. But the Vanguard Total World Stock ETF (VT), for example, holds both U.S. and international stocks — roughly 60% domestic and 40% international (5).
And the Vanguard FTSE Developed Markets ETF (VEA) focuses on developed international markets, including Europe, Japan and Australia, and trades at lower valuations than U.S. equities (6).
Arnott says diversification doesn’t have to be complicated.
“Even if you have a fairly simple approach of just building a portfolio focused on U.S. stocks, international stocks and investment-grade bonds, that can take you pretty far from a diversification standpoint,” she said (7).
It also shows that the 60/40 portfolio isn’t dead — it just needs a little diversification.
Still, unless you’re a finance guru, it can be overwhelming to choose the individual investments that make the most sense for your situation.
That’s where expert insights can be a game-changer.
Moby offers expert research and recommendations to help you identify strong, long-term investments backed by advice from former hedge fund analysts.
In four years, and across almost 400 stock picks, their recommendations have beaten the S&P 500 by almost 12% on average. They also offer a 30-day money-back guarantee.
Moby’s team spends hundreds of hours sifting through financial news and data to provide you with stock and crypto reports delivered straight to you. Their research keeps you up-to-the-minute on market shifts and can help you reduce the guesswork behind choosing stocks and ETFs.
Plus, their reports are easy to understand for beginners, so you can become a smarter investor in just five minutes.
Once you’ve got your eye on some appealing investments, it’s time to make your move. And if you’re ready to move beyond a traditional portfolio, you may want to focus on options that allow you to invest in alternatives — like a self-directed account with IRA Financial.
IRA Financial gives you the freedom to invest in alternative assets like real estate, private equity, precious metals and crypto within a self-directed retirement account. And now you can add real-time, public market investing powered by Interactive Brokers, a trusted global brokerage.
For the first time, you can manage both traditional and alternative assets seamlessly within a single self‑directed retirement structure, all for a flat fee.
Complete the application online in minutes to open your self‑directed retirement account with stock trading access powered by Interactive Brokers.
Something is missing from traditional portfolios.
As evidenced by Morningstar’s diversification report, in a period of heightened market volatility, stocks and bonds alone may be less reliable for consistent long-term growth.
And as alternative investments become more accessible and attractive, more investors are seeking smarter ways to diversify.
Now, Masterworks is offering a simple way to do that with a single investment that combines blue-chip art with other scarce assets, such as gold and bitcoin, which have historically moved independently of equities and of one another.
The result is a more balanced, all-weather approach to alternative investing. In fact, this model would have outperformed the S&P 500 by 3.1x from 2017 to 2025.*
By leveraging access to museum-quality artwork alongside other uncorrelated assets, the strategy aims to enhance diversification while still pursuing meaningful appreciation.
Discover how diversifying with this strategy can strengthen your portfolio for the years ahead.
*Investing involves risk. Past performance is not indicative of future returns. The 3.1x figure reflects a model backtest, not actual fund performance.
— With files from Godwin Oluponmile
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We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Morningstar (1), (7); CNBC (2), NPR (3); USA Today (4); Vanguard (5), (6)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Four leading AI models discuss this article
"Morningstar's 20-year risk-adjusted data indicates 2025's diversified outperformance was likely a one-off regime rather than a durable shift warranting complex portfolios."
The article highlights 2025's 5% outperformance by an 11-asset mix (18.3% vs 13.3% for 60/40) driven by a 9%+ USD decline, 32% ex-US equity rally, and 70% gold surge amid geopolitics. Yet Morningstar's own 20-year record shows 60/40 superior on risk-adjusted returns because U.S. equities compounded at 14.5% annualized versus 7.6% for international. Arnott herself recommends limiting exposure to just U.S. stocks, international equities, and short/intermediate bonds while avoiding heavy gold or private assets. Missing context includes whether the weak-dollar and safe-haven flows reverse once tensions ease, potentially leaving diversified holders with persistent drags seen from 2009-2024.
If geopolitical fragmentation and de-dollarization prove structural rather than cyclical, the 2025 pattern could extend, making the 20-year U.S. dominance the true anomaly and punishing any portfolio still overweight domestic equities.
"One year of outperformance driven by cyclical currency and commodity moves does not overturn 20 years of 60/40 risk-adjusted superiority, and the article's pivot to alternative assets is marketing, not analysis."
The article conflates a one-year outperformance (2025) with a structural case for diversification, but buries the crucial fact: over 20 years, 60/40 delivered better risk-adjusted returns. The 11-asset portfolio's 2025 win hinged on three cyclical tailwinds—dollar weakness, international mean reversion, and gold's geopolitical bid—none of which are guaranteed to persist. The article then pivots to hawking alternatives (Masterworks, private equity) via sponsored content, which undermines credibility. Morningstar's own strategist recommends a simpler three-asset approach, not the 11-asset portfolio tested. This is survivorship bias dressed as insight.
If dollar weakness and geopolitical fragmentation are structural (not cyclical), then international diversification and gold exposure may genuinely outperform the next 5–10 years, making 2025 a regime shift rather than noise.
"The 2025 performance gap is driven by a non-replicable gold spike and currency volatility, making it a dangerous blueprint for long-term asset allocation."
The 2025 outperformance of the 11-asset model is a classic case of chasing 'recency bias.' While the article highlights a 5% alpha, it ignores the massive drag of transaction costs, tax inefficiency, and the 'rebalancing premium' required to maintain such a fragmented portfolio. A 70% surge in gold—likely a speculative bubble fueled by geopolitical fear—is a non-repeatable outlier, not a structural investment thesis. Investors pivoting now are essentially buying the 2025 winners at peak valuations. The real risk isn't 'not being diversified enough'; it is the complexity risk of managing 11 asset classes, which often leads to behavioral errors during the inevitable market drawdowns.
If the U.S. dollar continues its structural decline and inflation remains sticky above 2%, the 60/40 model will face a decade of negative real returns, making the 11-asset diversification strategy a necessary survival tactic rather than a tactical preference.
"Diversification can help in specific regimes, but there is no solid, durable proof yet that an 11-asset approach universally outperforms a simple 60/40 strategy."
Morningstar’s 11-asset mix outperformed 60/40 by about 5% in 2025 and ~3% through mid-April 2026, driven by a weaker dollar, stronger international valuations, and a gold rally. But this looks regime-dependent, not a durable upgrade: over 20 years, 60/40’s risk-adjusted results were better, suggesting the diversification boost could fade if macro conditions shift. The article omits key context: volatility and drawdown profiles, rebalancing/tax costs, and currency risk for USD investors. It also glosses over potential correlation spikes in a crisis where ‘diversifiers’ may fall together, and it relies on a short window and marketing-heavy sources. In short, diversification helps in some regimes, not as a universal replacement.
The outperformance rests on a rare macro setup (dollar weakness, gold surge) that may not repeat; if conditions revert, the 11-asset mix could underperform while adding complexity and cost. Regime risk remains real.
"Drawdown correlations in a USD reversal remain the unexamined risk that could punish the 11-asset mix beyond costs."
Gemini overstates complexity risk as the core flaw while underplaying how Arnott's own three-asset limit already sidesteps most rebalancing drags. The unaddressed connection is that ChatGPT's omitted drawdown data could reveal whether gold and ex-US equities amplify losses together in a USD rebound, turning 2025's tailwinds into amplified 60/40 outperformance rather than neutral noise.
"The real tail risk isn't rebalancing drag—it's forced selling of illiquid positions during the regime shift that kills the diversification thesis."
Grok flags the missing drawdown data—critical. But here's what nobody's surfaced: if gold and ex-US equities *do* correlate during USD strength reversals, the 11-asset portfolio's 2025 alpha evaporates *and* you're left holding illiquid alternatives (Masterworks, PE) that lock capital precisely when you need liquidity. That's not complexity risk; that's liquidity trap risk. Arnott's three-asset model sidesteps this entirely.
"The 11-asset portfolio's gross alpha is likely illusory once you account for the significant tax drag and transaction costs of maintaining such a complex, illiquid allocation."
Claude is right about the liquidity trap, but misses the tax drag on the 11-asset model. Frequent rebalancing across 11 classes—especially with taxable private assets—creates a phantom cost that likely erodes the 5% alpha Grok cited. We are debating 2025 performance while ignoring that the tax-adjusted net return for the average investor in this complex mix is probably inferior to a simple, tax-efficient 60/40 index strategy, regardless of the macro regime.
"In a crisis, liquidity risk of the 11-asset mix—especially private assets—dominates, potentially erasing 2025’s alpha and leaving it more fragile than 60/40 even if drawdowns align with gold/FX moves."
Response to Grok: I agree drawdown data matters, but the real stress comes from liquidity risk in a crisis. The 11-asset mix includes illiquid private assets; during a USD squeeze or crisis, forced redemptions and margin calls hit those pockets hardest, not just cross-asset correlations. That liquidity trap risk can erase the 2025 alpha and crush tax-adjusted returns, making 60/40 look relatively resilient by design.
The panel consensus is that the 11-asset diversification strategy's 2025 outperformance may not be sustainable or repeatable due to its reliance on cyclical tailwinds and potential risks such as liquidity traps, tax drag, and correlation spikes in a crisis. A simpler, tax-efficient 60/40 index strategy may be more resilient.
None explicitly stated.
Liquidity trap risk during USD strength reversals or crises, which could erase the 2025 alpha and crush tax-adjusted returns.