Even as they show impressionable gains in 2025, diversification strategies can’t hold up to the traditional 60/40 portfolio model over the long-term, shows new findings from Morningstar.
To test the value of portfolio diversification, Morningstar created a portfolio consisting of 11 asset classes. This included 20% of the portfolio to larger-cap domestic stocks, 10% each to developed and emerging market stocks, treasuries, U.S. core bonds, global bonds, and high-yield bonds; and 5% each to U.S. small-cap stocks, commodities, gold, and REITs.
The firm’s diversified test portfolio gained 18.3% in 2025, compared to 13.3% for a basic 60/40 portfolio consisting of U.S. stocks and investment-grade bonds. This was as gold surged by nearly 70% and as diversified asset classes saw lower correlations.
The diversified portfolio also performed marginally better than Morningstar’s U.S. Market portfolio, which came in at a 17.35% return, and significantly higher than the U.S. core bond portfolio at 7.12%.
Despite the outperformance from diversified portfolios, traditional methods outperformed in the long-term due to endurance factors. Over a 10-year period, 60/40 portfolios delivered higher risk-adjusted returns at 9.55%, compared to 8.19% for diversified portfolios. In two decades, traditional portfolios returned 9.68% relative to 7.13% for diversified portfolios.
“Although a broadly diversified portfolio improved risk-adjusted returns versus an all-stock portfolio during most rolling 10-year periods between January 1976 and August 2017, the diversified portfolio posted weaker risk-adjusted returns over most periods since then. The basic 60/40 portfolio, on the other hand, fared better than the stocks-only benchmark in about 80% of the rolling periods going back to 1976 and came out ahead of the more broadly diversified version in every rolling 10-year period since early 2005,” researchers wrote.
Investors wanting to incorporate diversification to their portfolios may only need to add a mix of larger-cap stocks and bonds rather than invest in diversified strategies, notes Morningstar’s researchers.
The report also recommends retirees hold onto cash and short-term bonds alongside intermediate- and longer-duration core bond holdings.
The findings emphasize the significance behind investment correlations and how adding diversification can impact interactions. According to the findings, combining securities that have correlations below 1.0 can lessen the portfolio’s overall risk profile, which in turn could reduce the amount of market volatility.
Despite its impact, Morningstar notes how diversified portfolio strategies haven’t performed well over longer periods in the last two decades, even if they have in the short-term. “Diversification helped reduce risk but not enough to result in better risk-adjusted returns, as measured by the Sharpe ratio,” Morningstar’s researchers added.
Further, not every asset type with a low correlation is worth adding to a diversified portfolio, researchers state. As returns are dependent on shifting market environments, the volatile nature of cryptocurrency and reduced liquidity of private investments can be impractical for investors saving for retirement.
“Indeed, investors should be skeptical about optimistic claims about future diversification benefits from newer asset classes, such as private equity, private credit, and cryptocurrency,” the researchers wrote. “In the first two cases, apparently low correlation metrics can mask potential dangers such as stale pricing and lack of liquidity.
“For cryptocurrency, correlations have been trending higher and can be completely overwhelmed by drastic price movements, as evidenced by the “crypto winters” that seem to resurface every few years,” they concluded.
Still, Morningstar’s researchers note how holding a variety of asset classes could help protect against overexposure to one main area. Investing in several specific asset classes, like international stocks, could help investors increase long-term returns without adding too much risk.