Think of your investment portfolio like a fruit stand. You wouldn’t stock only oranges and call it a day, especially during hurricane season in Florida. If a storm wipes out the orange groves, you’d still want apples from the Northeast and bananas from Hawaii to keep your business running. Your investment portfolio works the same way. Spreading your money across different types of investments helps protect you when one area gets hit hard.

Diversification isn’t about showing off how many different investments you can name. It’s about creating a safety net that lets you sleep better at night while still growing your money over time. And in 2025, with markets facing uncertainty around policies, interest rates, and global economics, this strategy has proven its worth more than ever.

What Diversification Really Means

True diversification involves owning stocks from various industries, countries, and risk profiles. It also means investing in other asset classes beyond equities, such as bonds, commodities, and real estate, whose performance isn’t usually in sync with stocks during different market environments.

Here’s how it works in practice. When stock prices fall, bonds typically (but not always) go up. When U.S. companies struggle, international companies might thrive. When tech stocks stumble, utility companies often hold steady because people still need electricity regardless of what’s happening with artificial intelligence.

Non-US stocks have gained about 12% versus a 2% gain for US stocks so far in 2025, showing exactly why putting all your eggs in one geographical basket can cost you money.

The Numbers That Matter

Let’s talk real dollars. During the 2008-2009 financial crisis, when nearly everything seemed to lose money, diversification still made a meaningful difference. A diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments lost less than an all-stock portfolio in the downturn, and while it trailed in the subsequent recovery, it easily outpaced cash and captured much of the market’s gains.

In 2025, the value of diversification has been particularly clear. A basic 60/40 portfolio combining US stocks and investment-grade bonds has lost about half as much as an equity-only portfolio for the year to date through April 15. While having some bond exposure has been helpful, a broader approach to portfolio diversification has paid off more, with some diversified portfolios actually showing positive returns during volatile periods.

Building Blocks of a Diversified Portfolio

Start With the Big Three

Most portfolios begin with three main asset classes: stocks, bonds, and cash or cash equivalents. Stocks offer growth potential but come with higher risk. Bonds provide stability and income but typically lower returns. Cash gives you flexibility and safety but loses purchasing power to inflation over time.

A good rule of thumb is to own at least 25 different companies. However, it’s important that they also be from a variety of industries. You don’t want a dozen tech giants and call it diversified. If tech spending takes a hit, all those companies could decline together.

Look Beyond Your Backyard

International investing isn’t just for sophisticated investors anymore. We’ve seen the US dollar has lost about 8% of its value, which has been a positive if you’re a US-based investor investing in international stocks this year. Different countries have different economic cycles, and what hurts American companies might actually benefit businesses elsewhere.

However, international investing does come with some additional considerations. You’re dealing with currency risk (when foreign currencies rise or fall against the dollar), different regulations, and potentially less familiar companies. Political instability or policy changes in foreign countries can also affect your investments in ways that might feel harder to predict than domestic issues.

Consider both developed markets (like Europe and Japan) and emerging markets (like India and Brazil). Markets in Europe, China, Japan and emerging economies may present opportunities, with varying monetary policies and economic conditions potentially stimulating growth. The most effective way to invest internationally is through low-cost index mutual funds or exchange-traded funds that give you broad international exposure in one package.

Don’t Forget Alternative Investments

Real estate investment trusts (REITs) let you invest in property without buying buildings. Gold has definitely done extremely well. It’s up about 30% so far this year through the beginning of June. Commodities can hedge against inflation. These alternatives often move differently than stocks and bonds, providing additional cushioning.

Simple Ways to Get Started

You don’t need to become a financial wizard to build a diversified portfolio. One quick way to do that for those who don’t have the time to research stocks is to buy an index fund. A total stock market index fund, for example, owns pieces of thousands of companies across all sectors and sizes.

Target-date funds take it even further by automatically adjusting your mix as you get older. Both allocation and target-date funds combine stocks and bonds in one portfolio, providing asset-class diversity in a single fund and thereby reducing the need for a lot of oversight.

For those with more time and interest, you can build your own mix. Start with broad market funds for your foundation, then add international exposure, some bonds for stability, and perhaps a small allocation to REITs or commodities.

The Rebalancing Reality Check

Creating a diversified portfolio is just the first step. Over time, some investments will do better than others, throwing your original allocation out of whack. If you started with 60% stocks and 40% bonds, a good year for stocks might leave you with 70% stocks and 30% bonds—more risk than you planned for.

At the very least, you should check your asset allocation once a year or any time your financial circumstances change significantly (for instance, if you lose your job or get a big bonus). Rebalancing means selling some of what’s done well and buying more of what’s lagged behind. It feels counterintuitive, but it forces you to buy low and sell high.

What Diversification Can’t Do

Here’s what diversification isn’t: a guarantee against losses or a way to maximize returns. The primary goal of diversification isn’t to maximize returns. Its primary goal is to limit the impact of volatility on a portfolio. You might miss out on the biggest winners, but you’ll also avoid the biggest disasters.

During market meltdowns, correlations tend to increase (meaning most investments move in the same direction, usually down). This happened in 2008 and again during the early days of the pandemic. Diversification doesn’t eliminate these risks entirely, but it typically reduces their impact.

Making It Work for You

Your perfect diversification strategy depends on your age, risk tolerance, and goals. A 25-year-old saving for retirement can handle more stock exposure and volatility than someone five years from retirement. Someone saving for a house down payment in two years needs a very different approach than someone building wealth for the next 30 years.

When an investor understands the different types of asset classes, sizes, styles and sectors, as well as their relationships to each other and the broader environment, they can construct their portfolios around their specific risk tolerance.

The key is starting with a plan you can stick with through market ups and downs. Many investors struggle to fully realize the benefits of their investment strategy because in buoyant markets, people tend to chase performance and purchase higher-risk investments; and in a market downturn, they tend to flock to lower-risk investment options (both behaviors that can derail long-term success).

Diversification isn’t glamorous, and it won’t make you rich overnight. But it’s one of the most reliable ways to build wealth steadily while protecting yourself from major setbacks. In a world full of financial uncertainty, that’s a strategy worth having in your corner.