Particularly within the advisor/client construct, the concept of diversification has evolved more rapidly than perhaps either party was expecting. Many advisors and clients were led to be that diverse portfolios were the way to go in terms of surviving bear markets and generating solid long-term returns.
That conventional wisdom worked pretty well for a lengthy period of time then along came an extended period of low interest rates in the U.S, exceptional performance by a relatively small number of large- and mega-cap growth stocks and a long spell of underperformance by international equities.
On the equity front, that script is flipping. Both developed and emerging markets soundly thumped U.S. rivals in 2025 and this year, the shine has materially come off the artificial intelligence (AI) trade. Said another way, investors that stayed diversified over the years have been rewarded, dating back to last year at least.
As the above examples highlight, markets can whipsaw investors with many in the retail, unadvised camp latching onto “the next big thing” while forsaking diversification. Likewise, clients may ponder the validity of diversification during times when leadership is sourced via a small number of asset classes. None of this means advisors should eschew the topic of diversification. Rather, they should focus on the messaging they use to convey its virtues.
Diversification as a Value-Add
Advisors shouldn’t be leery of talking about diversification with clients. Figure it this way. That topic may well be why some clients came aboard and it’s certainly of interest at a times when market leadership changes, as is the case today. In other words, diversification can be a value-add.
“Moreover, spending just a little more time on concepts like portfolio diversification can help showcase your value to clients,” notes Morningstar’s Samantha Lamas. Our research finds that investors want more than just portfolio advice: They want a coach, teacher, and a sounding board. Advisors are uniquely positioned to play these roles for investors, and that can start by tackling concepts like portfolio diversification when needed.
In terms of massaging the issue of diversification, advisors should dispel a preconceived notion held by many investors. That is diversification serving as a medium for embracing lagging assets that may never regain their lost luster. As advisors know, that’s not the case.
“When discussing portfolio diversification with clients, it may be worthwhile to emphasize that this diversification is not as simple as just varying your holdings,” adds Lamas. “Instead, it’s about combining assets in a portfolio that tend to behave differently, in a way that still aligns with the investor’s goals and risk profile.”
Two Diversification Points of Emphasis
As noted above, diversification isn’t about concocting a portfolio with a menagerie of assets simply in the essence of having different eggs in the basket. Rather, it’s about generating exposure to assets that aren’t joined at the hip in terms of behavior – also known as reducing correlations.
The second point of diversification emphasis for advisors is conveying to clients why diversification matters and how it can potentially benefit them over the long-term.
“Here’s where you can emphasize specific elements of portfolio diversification that can better resonate with clients based on their personal characteristics and tendencies,” concludes Lamas. “To add some color to this framework and help advisors use it in practice, below are a few examples of how to reframe a portfolio diversification discussion based on common investor personas.”
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