Broadly diversified portfolios outperformed the classic 60/40 model by five percentage points in 2025. This is the largest gap since 2009.
• Broadly diversified portfolios beat the 60/40 model
• Many S&P 500 index funds are no longer considered true diversification
• If you diversify too much, you risk an unwieldy portfolio with muted returns
Diversification is returning
A broadly diversified test portfolio made up of eleven asset classes achieved a return of around 18.5 percent in 2025, while the classic 60/40 portfolio of US stocks and US investment grade bonds achieved 13.3 percent, as Morningstar shows in its “2025 Diversification Landscape” report. “Our more diversified test portfolio gained around 18.5 percent in 2025, about five percentage points ahead of the classic 60/40 variant. This was the best performance of the diversified portfolio since 2009,” said Morningstar’s Amy Arnott, according to the June 2026 report.
The lead continues. As CNBC reported in April 2026, the more diversified strategy still outperformed the 60/40 model by three percentage points in the first few months of the current year, as of April 13, 2026. This means that what many investors had dismissed as unnecessary complexity for more than a decade has quickly become the dominant strategy.
Which asset classes drove diversification in 2025
Commodities made the largest contribution, especially gold, which gained around 66 percent in value in 2025. This means that gold recorded its strongest annual increase since 1979.
Copper, an industrial metal with high sensitivity to global growth expectations, gained around 45 percent in the same year, achieving its best annual return since the global financial crisis. In addition to raw materials, non-US and international stocks as well as alternative investments played a key role, as MarketWatch writes, citing the Morningstar evaluation. The background: For more than a decade, US mega-cap technology dominated the markets and made more complex portfolio structures simply unattractive. Accordingly, the concentrated 60/40 model outperformed broadly diversified portfolios in each rolling three-year period between June 2009 and December 2021. This phase ended abruptly.
The 60/40 portfolio
The current data is clear, but the long-term comparison is more nuanced. Over a 20-year time horizon, the classic 60/40 portfolio achieves an average annual return of 9.68 percent, according to a wealth management report cited by MarketWatch, while broadly diversified portfolios with at least eleven asset classes achieved 7.13 percent. Morningstar itself confirms this picture: Since 2005, the 60/40 portfolio has outperformed broad diversification in every rolling ten-year period.
Anyone who only reacts to current outperformance ignores this contradiction. Consultants like Jeff Judge put it directly to the portal: “Complexity has to earn its place at the table first. I don’t add diversifiers to a portfolio because they’re trendy, but only when a client’s specific situation requires it.” This is not a rejection of diversification, but rather a plea for its targeted use.
How advisors are now realigning their diversification strategy
On the equity side, international markets are coming to the fore. “I’m currently actively building international equities for most clients, not because I doubted U.S. markets, but because the valuation gap hasn’t been this big in decades,” Judge said. In addition, David Demming from Demming Financial relies on broad coverage: “We pursue a broadly diversified approach, both in the value and moderate growth areas, including international markets and emerging markets as well as small and mid-cap funds,” says Demming, according to MarketWatch.
There is also a turnaround in bonds. Jon Ulin, managing partner at Ulin & Co. Wealth Management, tells the news site a move toward short-term, investment-grade bonds and inflation-sensitive instruments like TIPS. Long-term bonds, on the other hand, are actively avoided. “What I avoid? Long-term bond funds at current yield levels,” Ulin is quoted as saying. The changed interest rate and inflation landscape makes long-term bonds a risk factor instead of a stabilizer.
Some consultants go even further. Thomas Balcom from 1650 Wealth Management reports that his company relies on structured products such as market-linked ones Bonds and buffered ETFs to build in loss buffers in volatile phases. Ulin describes his current model portfolios as closer to institutional allocations than to classic private investor models, with a structure of 40 percent stocks, 25 percent diversifying asset classes and 35 percent short-term bonds.
Are index funds still sufficient as diversification?
Another aspect that the debate brings to the fore is the question of whether standard index funds can still be considered diversified. According to MarketWatch, Michael DeMassa of Forza Wealth Management points out that many S&P 500 index fund prospectuses now contain a note stating that the fund can be classified as non-diversified under the Investment Company Act of 1940. The background: The technology sector currently accounts for around 33 to 34 percent of the total weight in the S&P 500, the ten largest positions account for almost 39 percent of the fund volume, as Aktiencheck reports with reference to index data. Handelsblatt noted at the beginning of 2026 that the index is more concentrated than it has been since the dot-com bubble.
Anyone who believes that a broad market index provides sufficient diversification is subject to a structural misunderstanding. The apparent breadth of the S&P 500 hides a significant bet on a few technology companies.
Paul Schütte, editorial team at finanzen.net