Markets have been anything but steady lately. Rising geopolitical tensions, stubborn inflation pressures, and renewed conversations around tariffs linked to President Trump’s economic policies have all fueled a surge in volatility. In periods like this, feeling unsettled is only human. But it’s also when the value of diversification becomes especially clear. A thoughtfully diversified portfolio won’t eliminate all risk, but it can help soften the blow of market turbulence and provide a stronger, more resilient base for long-term growth—no matter what the news cycle brings.

Understanding Diversification: How It Works

Diversification is all about managing risk by spreading your investments across a variety of assets. Rather than concentrating your money in one place, you distribute it among different asset classes, industries, regions, and risk profiles.

The goal is to build a portfolio where not everything moves in lockstep. If one area of the market stumbles, others might remain steady—or even gain ground—helping to smooth out returns and limit the impact of sharp declines.

This isn’t just theory at work. Morningstar reports that, as of April 15, a traditional 60/40 portfolio of U.S. stocks and investment-grade bonds has experienced roughly half the losses of an all-stock portfolio so far this year. Meanwhile, portfolios with international exposure have also fared better, with developed markets like Europe, the U.K., and Japan outperforming U.S. equities in recent months.

While diversification doesn’t guarantee against losses, it does create a stronger, more balanced foundation—giving your investments a better chance to weather whatever challenges the markets may throw your way.

Stocks vs. Bonds: How Bonds Help Steady Your Portfolio

While stocks often grab the spotlight with their potential for higher returns, they can also bring significant volatility. Bonds, on the other hand, play a quieter but critical role in a diversified portfolio, offering stability when markets turn turbulent.

When stocks decline sharply, many investors gravitate toward bonds—particularly U.S. Treasuries—which are generally seen as safer, more reliable assets. This move, often called a "flight to quality," can lift bond prices (since bond prices and yields move inversely), helping to cushion your portfolio against stock market losses.

Historically, bonds have tended to move differently—or even opposite—from stocks during periods of market stress. For instance, in the first quarter of 2025, while the S&P 500 fell by - 4.3%, the Bloomberg U.S. Aggregate Bond Index gained +2.8%, highlighting bonds' ability to provide balance when equities stumble.

However, it's important to remember that not all bonds react the same way. Corporate and high- yield bonds, for example, can behave more like stocks during downturns, exposing investors to additional risk. That’s why building a resilient portfolio means understanding how each investment contributes to your overall strategy—and ensuring it aligns with your long-term goals and risk comfort.

U.S. vs. International: Why Global Diversification Matters

It’s natural to stick with what’s familiar, and for many investors, that means a heavy focus on U.S. stocks. After all, the S&P 500’s strong run over the past decade has made a domestic tilt seem like a winning strategy. But leaning too heavily on a single market—even one as dominant as the U.S.—can expose your portfolio to unnecessary risks.

According to research from Franklin Templeton, the average U.S. investor allocates about 79% of their equity holdings to domestic stocks, even though the U.S. represents just 26% of global GDP and around 70% of the world’s total market capitalization. That imbalance means potentially missing out on broader global growth.

History shows that international markets often step up when U.S. returns falter. Franklin Templeton found that since 1971, during decades when the S&P 500 delivered less than 6% annually, developed international markets (tracked by the MSCI EAFE Index) and emerging markets (tracked by the MSCI Emerging Markets Index) outperformed U.S. stocks by an average of 2.0% and 12.1% per year, respectively, more than 90% of the time.

We’re seeing a similar trend so far in 2025. International equities have outpaced U.S. stocks, fueled by more attractive valuations, a softer dollar, and growing concerns over how renewed tariffs might impact the U.S. economy. Spreading your investments globally isn’t just smart—it’s essential for building a resilient, opportunity-rich portfolio.

Diversification: Powerful Over Time, Imperfect in the Short Term

A well-diversified portfolio is designed to smooth returns over time, but there are periods when diversification may fall short of delivering the protection—or the upside—investors anticipate.

For example, the rise of the so-called “Magnificent 7”—a handful of tech giants dominating U.S. market gains in recent years—meant that broadly diversified portfolios often lagged behind those concentrated in just a few stocks. While diversification can help limit losses during market downturns, the tradeoff is that your portfolio may not always capture the full upside of the market’s latest high-fliers.

Similarly, research from State Street shows that during inflationary periods, the typical inverse relationship between stocks and bonds can break down. In 2022, for instance, both asset classes declined simultaneously as inflation dominated headlines, reducing the usual safety net bonds provide.

Periods of extreme market stress can also compress correlations across sectors and regions. During the 2008 financial crisis, nearly every market moved together, sharply limiting the benefits of diversification. In turbulent times, fear often overtakes fundamentals, causing even traditionally uncorrelated assets to behave similarly.

Despite these exceptions, a diversified portfolio remains a cornerstone of sound investing. It won’t prevent every loss, but it can help cushion severe downturns and improve your chances of a steadier investment journey over time.

Navigating Uncertainty with a Diversified Portfolio

While no strategy can eliminate market risk altogether, a thoughtfully diversified portfolio can help you weather uncertainty with greater resilience and clarity. By allocating your investments across a range of asset classes, sectors, and geographies, you can reduce vulnerability to any one area, soften the impact of volatility, and stay firmly aligned with your long-term goals.

If recent market turbulence has you second-guessing your investment approach—or wondering whether your portfolio is as resilient as it should be—now is the perfect time to connect with Financial Security. Together, we can evaluate your current strategy, identify opportunities for greater diversification, and build a plan designed to help you thrive in any market environment. Contact us today to get started.