The past 14 months have been a shining example of why diversification matters in an investment portfolio. Those of you who diversified well have likely reaped the rewards!
I’ve spoken often about the rationale for diversification in an investment portfolio. The primary purpose of diversification is to reduce risk and volatility without giving up returns. This has been called “the only free lunch in investing” by Nobel laureate Harry Markowitz.
Diversification can be done at a number of levels. We often talk about using multiple asset classes, like stocks and bonds. Within those classes, further diversification is recommended. In the case of stocks, you can invest in different sizes of companies, companies with different styles (ie- growth, value, blend), and U.S. or foreign stocks, for example.
At the beginning of 2025, it would have been easy for U.S. large-cap investors to feel good about ignoring diversification. For the 10-year period from 2015-2024, no other segment of the stock market outperformed large-cap U.S. stocks. The S&P 500 Index averaged a total annual return of about 16%. But if your portfolio lacked solid diversification beyond large-cap U.S., you’ve missed out during the past 14 months. As of February 16, 2026, the MSCI Global Index, excluding U.S. stocks, returned 35.3%, while the S&P 500 Index gained 13.7%. In just the first 6 weeks of 2026, the same MSCI Index has gained 8.5% while the S&P 500 was roughly flat (all market data cited her was provided by FactSet Data).
Similarly, U.S. small-cap stocks have outperformed U.S. large-cap stocks recently, with a total return of 6.7% for the Russell 2000 Index so far in 2026.
That’s the point. When you pick only a particular part of the market to invest in, you are largely guessing. You may catch a nice run, like the recent 10-year performance of the S&P 500, but there is nobody out there who can reliably predict when that leadership will end. If you get in too late or stay in too long (or not long enough), your performance can be far below what I’ve quoted here, and you are taking more risk by throwing all of your dollars at one segment of the market.
You can often reduce your portfolio’s volatility without giving up expected returns by implementing enhanced diversification. Consider using 5 to 10 good, low-cost ETFs that provide exposure to different parts of the market. There are never any guarantees in investing, but smart portfolio design can tilt the odds in your favor.
However you choose to have your “free lunch”, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
