Diversification Strategy Insights: What’s Driving Diversification Gains in 2026 Markets?

Arnott: Last year was a vindication for long-suffering diversification advocates. Our broadly diversified test portfolio returned about 18.5%, roughly 5 percentage points ahead of a plain-vanilla 60/40 portfolio, the best showing for the more diversified approach since 2009.  

Gold was up about 70%, international stocks gained about 30%, US stocks added about 15%, and bonds really returned to their traditional role as portfolio ballast. So far in 2026, the diversified portfolio is up about 7.6% versus roughly 5% for a basic 60/40. That said, over the past 20 years, a basic 60/40 delivered better returns with lower risk. These things tend to go in long-term cycles, so it's helpful to look at performance over really long time periods.  

Benz: Two major factors: a weaker dollar and notable undervaluation in non-US stocks heading into 2025. Those two forces have been a wonderful tailwind for long-suffering international equity investors. US to non-US correlations are at their lowest level in a decade. I don't know whether that'll be a persistent trend, but it's certainly a positive one.  

Arnott: We've also seen correlations trending down in international markets, some signs of deglobalization, or global markets just not moving as closely in tandem. Within US equities, as the market grows more concentrated in large-cap growth and tech, the whole value column of the style box (large, mid, and small value) has had the best diversification benefits, with three-year correlations all below 0.8.  

Benz: In 2022, the wheels came off the traditional stock-bond relationship, as rising rates hurt both at the same time. By the end of 2025, correlations had decreased, and high-quality fixed income had returned to its traditional role in portfolios.  

US government and agency-backed bonds are the most reliable, especially in recessionary bear markets. High-yield bonds and bank loans are less effective; hold them for yield, not to offset stock risk. In 2022, with stocks and bonds both down, cash investors with higher yields coming online were actually the winners in that environment.  

Municipal bonds are a notable exception. Even though they're high quality, their correlations with equities have remained elevated since 2022, partly because the muni market is less liquid and is tilted toward intermediate- and longer-duration issuance.  

Reyna: They serve very different functions. I think of gold as like the fire extinguisher in the house, it's just that kind of protection you have when you need it most. Broader commodity buckets work more like specific macro hedges with distinct supply-and-demand drivers. Gold and silver should also be treated as two separate exposures: in 2025, both performed well, but the economic drivers were substantially different. Silver was driven by industrial demand in solar, EVs, and data centers. Gold is purely the safe-haven play. 

Reyna: They look very attractive, mainly due to their smoother performance, but that can be misleading. It really doesn't mean lower risk. The valuations and pricing timeframes for these assets are very different from those in public markets. Private equity essentially behaves like small-cap leveraged stocks with a lockup.  

During COVID, the US market index fell about 20% at one point, while the private sector reported only a moderate loss at the same time. But they were under the same pressure; a lot of investors couldn't get their money out, valuations eventually caught up, and some 2020 vintages are still underwater today. The timing of liquidity issues can coincide with crisis periods when public markets aren't doing well, making it the worst-case scenario.  

Arnott: Inflation is a negative for equities because companies see their underlying costs increase—things like employee wages and benefits and raw materials used to make products. We've typically seen lower returns from stocks during periods of high or unexpected inflation, such as the 1970s. The asset classes that tend to hold up better are commodities, gold, and TIPS, though TIPS carry interest-rate sensitivity and aren't a one-to-one hedge over short periods.   

Benz: For recessions, high-quality fixed income had positive returns in all eight of the recessionary periods we examined. Gold also held its ground. Broad commodities were less reliable. The conventional wisdom has often been that investors should go long duration in a recession, but the data are actually very mixed on whether that pays off. 

Reyna: Not all alternatives diversify the way investors expect. A lot of them behave like equities, with high correlations and high beta, which is the worst-case scenario for a diversifier. Things like hedged equity might not be the first place to look. If you're already in a 60/40, getting alternatives might not even be a necessity.  

If you do have specific risk goals, trying managed futures (alternative investments that use a portfolio of futures contracts to diversify and reduce portfolio risk) is worth a look. Historically, while last year's performance wasn't great, it has performed very well during stress periods. You can see that clearly in 2008 and 2022.  

• Diversification is having its best stretch in years, but it runs in long-term cycles. Evaluate the approach over the longest possible horizon, not a single-year result. 

• Gold and broad commodities serve different purposes. Gold is an all-weather portfolio anchor. Commodity baskets are macro hedges. Treat silver as a distinct industrial exposure with its own drivers. 
• High-quality bonds have recovered their diversification role after 2022's dislocation, but expect that relationship to strain again during rate-hiking periods. 
• Smooth returns in private markets often reflect stale valuations rather than low risk. Liquidity risk tends to surface at exactly the wrong moment. 
• More diversification is not always better. As Arnott noted, a core portfolio of US stocks, international stocks, investment-grade bonds, and cash meets most investors' needs. Additional asset classes are optional.