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Diversified portfolios outperformed the traditional 60/40 model in 2025, according to the 2026 Diversification Landscape report from Morningstar. However, over a 20-year period, traditional portfolios generated better risk-adjusted returns, leading the firm’s researchers to conclude that investors benefit most from adding only a few diversifiers to their holdings in modest amounts. International equities appeared to offer some of the best diversification benefits while limiting risks.
“Diversification is a good thing, and we definitely saw the benefits of a more diversified approach in 2025, as well as so far this year with all the market volatility,” said Amy C. Arnott, portfolio strategist at Morningstar and one of the report’s authors. “But over the long term, more diversification isn’t necessarily better, especially when it comes to more volatile asset classes like gold, cryptocurrency or things like private equity and private credit. They might appear to have uncorrelated returns on the surface, but at the end of the day, you are still getting exposure to equities or fixed-income securities.”
Most investor portfolios would benefit from a combination of allocations to U.S. and international stocks and investment-grade bonds, along with cash for emergencies, Arnott noted. Allocations to any additional asset classes should be viewed as optional and kept under 5% to minimize risk, since performance correlations with equities can shift higher with changes in market conditions, she added.
Last year, Morningstar’s diversified “test” portfolio, which included a 20% allocation to large cap U.S. stocks, 20% allocation to international stocks in both emerging and developed markets, 10% allocation each to Treasuries, U.S. core bonds, global bonds and high-yield bonds, and 5% allocation each to U.S. small-cap stocks, commodities, gold and REITs, posted a total return of 18.3%. This result was 500 basis points above Morningstar’s plain 60/40 portfolio that focused on U.S. equities and U.S.-based investment-grade bonds. The diversified portfolio also performed slightly better than Morningstar’s U.S. Market portfolio, which posted a 17.35% return, and much better than the U.S. core bond portfolio, which delivered a 7.12% return.
At the same time, over the longer term, diversified portfolio strategies didn’t perform as well as the plain 60/40 model, Morningstar found. Over a 10-year timeline, Morningstar’s 60/40 portfolio delivered a total return of 9.55%, compared to the diversified portfolio’s 8.19%. Over two decades, the 60/40 portfolio delivered a total return of 9.68%, while the diversified portfolio delivered a total return of 7.13%.
Some of the difference between the multi-year returns and diversified portfolios’ outperformance in 2025 could be explained by the fact that U.S. stocks and bonds delivered particularly strong performance for most of the past two decades. During the same period, between 2000 and 2024, international equities and many specialized asset classes posted weaker returns. Last year brought a reversal to those trends, bolstering international equities and gold as the U.S. dollar suffered from rising volatility.
Other factors impacting the difference in short-term and long-term portfolio performance include the fact that correlations between asset classes increase during periods of market volatility, potentially erasing some of the diversification benefits, while adding assets that moderate volatility can also lower returns.
Long term, a broadly diversified portfolio may not offer the same benefits as it did in 2025, Morningstar researchers warn. For example, private equity and private credit may have low correlation with stocks and bonds, but can come with stagnant pricing and limited liquidity. Because private assets are typically valued on a monthly or quarterly basis, often using opaque methods, their “low volatility” is a mirage, the report notes. “With low disclosure and transparency, frequent use of leverage, and valuations changes that are both lower in scale and frequency than public markets, these should be considered one of the riskiest asset classes in an investor’s portfolio, despite often being sold as having lower risk,” Morningstar researchers wrote.
They point to how alternative asset managers bought many private assets at very high valuations in the early 2020s, encouraged in part by historically low interest rates. But as interest rates rose in subsequent years, the funds’ debt costs went up as well, while the assets’ expected future cash flows declined. As a result, many private equity and venture capital funds have yet to exit their 2020 investments, leading to investors getting less money back in 2025 than has been the historic norm.
Another popular diversifier, cryptocurrency, has shown it can correlate too closely with the traditional asset classes. In addition, because of its tendency toward wild price swings, cryptocurrency may not be the best option for investors unwilling to remain committed to the asset class in the long term.
To gain diversification benefits over the longer time horizon, investors would be better served by adding high-quality bonds to their portfolios, as the correlation between stocks and bonds has historically remained below 0.6. Bonds also tend to deliver positive returns during economic downturns, while equities suffer. For example, Morningstar found that during the height of the COVID-19 pandemic, from February through April 2020, bonds delivered a total return of 2.98% as stock returns declined by 10.10%. Long-term Treasuries, in particular, posted a return of 15.45% during the spring of 2020. They also delivered total returns of 5.41% during the Great Financial Crisis, between December 2007 and June 2009, when most other asset classes posted double-digit declines.
“High-quality bonds, especially U.S. Treasury and agency mortgage bonds, have proved the best diversifiers for equity exposure over the past several decades. The reason is intuitive: Demand for Treasuries often spikes when investors are seeking safety. Moreover, interest rates often decline during such periods, providing another tailwind for government bond prices. Cash investments, while not technically under the bond umbrella, have also helped diversify equity exposure,” Morningstar researchers wrote.
International equities are another asset class that has delivered higher returns during recent periods of market volatility than U.S. equities. Last year, the Morningstar Developed Markets ex-U.S. Index and the Morningstar Emerging Markets Index delivered returns of 33% and 30%, respectively. In addition, while the performance of international equities over the last decade closely correlated with that of U.S. equities, over the past three years that correlation has trended lower. For the Morningstar Developed Markets ex-U.S. Index, it stood at 0.71 at the end of 2025. For the Morningstar Emerging Markets Index, it stood at 0.64.
If the value of the dollar continues to decline, or if the U.S. experiences a recession that international markets manage to avoid, that correlation could drop even further, according to Morningstar.
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