When markets are climbing steadily, and your portfolio balance keeps inching higher, diversification can start to feel a little… unnecessary. If your investments are achieving solid returns, why mess with them? Wouldn’t pulling out now be counterproductive?
It’s a natural reaction: strong up markets make you feel more comfortable taking risks. You might feel more confident holding fewer investments, leaning heavily into what’s been working, or letting a handful of positions grow into a much larger share of your portfolio than you originally intended.
Believe it or not, this is exactly when diversification matters most. Not because something bad is guaranteed to happen, but because periods of calm are often when portfolios become most vulnerable to future surprises.
Why diversification feels less important when markets are good
Recency bias is a strong force that often shapes how people invest and what they expect to happen in the future. When markets rise steadily over an extended period of time, our brains may naturally assume that what just happened will keep happening. The longer the upward trend lasts, the easier it can become to believe that the current environment is simply "how things are now."
This internal justification often leads investors to take more risks. Recency bias might, for example, make you feel comfortable with...
- Doubling down on a sector that’s been skyrocketing in recent months
- Letting a few stocks grow into oversized positions
- Not rebalancing regularly because everything looks fine on paper
Remember, strong markets don’t remove the risks involved with investing. They just make them harder to see. Take, for example, the longest bull market run in history, which lasted 10.9 years, from March 2009 to February 2020. Over this time, the S&P 500 experienced annualized returns of 15.9%, with a cumulative, nearly 11-year return of 399.5%.1 Yet, in mid-February 2020, everything shifted when fears around Covid hit the U.S. hard. Investors spooked, markets plummeted, and many publicly traded companies (both large and small) experienced persistent challenges moving forward.
Historical performance helps, but promises nothing
If you’ve ever read a performance chart or reviewed an investment product’s fine print, you’ve probably come across the disclaimer: Past performance does not guarantee future results. While it sounds like legal jargon (because in many cases, it is required language), that doesn’t negate the fact that it’s one of the most important reminders in investing.
Markets are influenced by far more than earnings reports and company performance. Government policy changes, geopolitical tensions, trade decisions, natural disasters, corporate scandals, and shifts in investor sentiment can all move markets in ways no one can predict.
Diversification doesn’t stop volatility from impacting your portfolio altogether, but it can help prepare your portfolio for whatever direction the winds happen to blow. Whether the market keeps climbing or takes an unexpected turn, a diversified portfolio is designed to adapt—either helping to cushion the blow or capture upside. Sometimes it can even do both, depending on how certain assets are performing.
Portfolio performance is personal
Here’s an important reminder: market performance and your portfolio performance are not the same thing.
The S&P 500 could be hitting new highs, but that doesn’t automatically mean your portfolio is too. Your own investing results depend entirely on what you actually own. If your investments are heavily tilted toward a few companies, a single sector, or employer stock, your portfolio’s fate is tied much more tightly to those holdings than to the market at large.
Broadening your exposure across sectors, asset classes, geographic regions, and risk profiles gives your portfolio more ways to grow and potentially hold strong against market shifts.
Diversification isn’t just for playing defense
Investors tend to think of diversification as a form of protection, or a strategy that helps cushion their portfolio when markets fall. However, diversification can be a powerful tool for pursuing growth.
Different parts of the market lead at different times. Some years favor bonds, others favor equities. Some periods reward technology stocks, others reward energy, healthcare, or industrial companies.
By diversifying, you give your portfolio more chances to benefit from whatever segment of the market happens to be moving forward—instead of hoping the same few investments always carry the load.
Common pitfalls to watch
Let’s take a look at some of the challenges investors run into when diversifying, and what you can do to help prevent or avoid them.
Ignoring international markets
We are a globally connected economy. If you’re not incorporating international diversification into your portfolio, you may be holding more risk than you realize—not to mention, missing out on important opportunities for growth.
Your portfolio could have the right asset types (stocks, bonds, and cash equivalents) at the right ratio. But if every investment you hold is U.S.-based, your portfolio is too concentrated and lacks diversification. The U.S. can experience certain setbacks, say challenges with the value of the dollar, geopolitical uncertainty (think tariffs), debt ceiling limits—and the domestic market may reflect this. Meanwhile, emerging markets and well-established international exchanges might be flourishing.
Market movements in 2025 are a prime example of this. Emerging markets returned 34.4% in 2025, making them the top-performing equity market for the year. U.S. equities still delivered returns of 17.9%, but 2025 marked the first time in 20 years that the S&P 500 was the worst-performing major equity market.2
Becoming overdiversified
Yes, there can be too much of a good thing, as it is possible to over-diversify your portfolio. Doing so creates a couple of issues.
First, overdiversification can dilute your growth potential by spreading your money too thin. When your capital is scattered across too many investments, it becomes harder for any one position to meaningfully impact your results. If you can’t significantly participate in the upside of a single investment, your growth potential is diminished.
You may also face the unexpected risk of duplicate holdings. When you invest in pooled funds (ETFs and mutual funds, for example), you purchase a share of the fund itself. However, the underlying holdings of that fund are spread across many different companies or assets.
When purchasing shares of various ETFs or mutual funds, understand what it is you’re actually investing in. You very well could hold shares of 20 different ETFs, which are all invested in essentially the same underlying assets. It’s not uncommon to unknowingly be overexposed to a singular stock or sector, simply because it’s weighted heavily across multiple funds.
That being said, index funds can still be excellent tools for diversification—especially if you’re simply interested in replicating an index’s performance (like the S&P 500). Just take the extra step to understand what you’re investing in and whether the underlying investments are already in your portfolio.
Not realizing you need it until it’s too late
The best time to incorporate diversification into your portfolio is before you need it. But no investor can predict with certainty when a market downturn will occur, or if their holdings will drop in value. Considering you can’t pinpoint when the markets will move, or in what direction, it’s better to prepare for the unexpected.
Diversification may be important to creating an "all-weather" portfolio, meaning it’s intended to withstand various market conditions (good and bad).
The takeaway
Diversification isn’t a flashy investment strategy that promises sky-high results overnight. It’s actually rather boring, but if done well, it can quietly do one of the most important jobs in investing: help protect your future self from risks you can’t see today.
An effective diversification strategy helps keep your portfolio flexible and resilient, no matter what tomorrow brings. If you’re concerned about your portfolio’s ability to withstand future market conditions, consider reviewing your current holdings and long-term goals with a financial professional.
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