Diversification Topped Plain Vanilla Last Year. That’s an Outlier
A comparison of a well-diversified portfolio versus the basic 60/40 strategy shows that plain vanilla won most of the time over 20 years, according to Morningstar.
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If hindsight is 20/20, it might be more like 60/40 for investing.
Portfolios with minimal asset-class diversification, such as 60% US stocks and 40% US investment-grade bonds, seriously lagged those that included a wider range of assets last year. Blame 2025’s volatility and series of highly unusual events like the “Liberation Day” tariffs, but while a 60/40 portfolio returned about 13% during the year, a more diversified portfolio built by Morningstar researchers returned 18%, according to a paper the company published Tuesday. The difference was largely thanks to the 11-asset-class portfolio’s allocations to international stocks and gold, portfolio strategist Amy Arnott said.
“The US market had been so strong for so long that a lot of investors were starting to write off non-US markets,” she said. “The performance we saw last year was a pretty strong vindication for the merits of global diversification.”
Farsighted Findings
While the 60/40 portfolio idea is more of a benchmark than a contemporary investment philosophy, it’s not refuted by Morningstar’s findings. That’s because 2025 was an outlier. The 60/40 portfolio in the research did better in most of the past 20 years than more highly diversified strategies, and the 60/40 approach still managed to outperform stock-only portfolios on a risk-adjusted basis 80% of the time, as far back as 1976, the authors noted.
A look at returns over time:
- During the past three years through 2025, the 60/40 portfolio returned 15.4% on average annually, compared with 13.99% for the diversified portfolio.
- Over five years, the 60/40 portfolio still led, at 7.97% versus 7.01%.
- That was also the case up to 20 years out, at which point the 60/40 portfolio returned 8.22%, and the diversified portfolio returned 7.13%.
Vision Correction: As much as the findings show the benefit of a plain-vanilla strategy, it’s worth noting that international markets are on the up and up, Arnott said. As for gold, though, it’s worth keeping as a small percentage of assets, at most, given its volatility, she said. “If we continue to see a weaker dollar and better valuations outside of the US, there is still a pretty strong argument for international diversification.”
