Realigning the approach to diversification in today’s complex landscape

Diversification was once a straightforward concept: own a varied basket of local or U.S. equities, sprinkle in some fixed-income exposure, and balance risks. While this traditional approach is still common in the United States and Canada, market realities are forcing investors to reconsider. As markets have evolved, marked by rapid technological change, global interconnectedness, and unpredictable risks, the old approach is no longer enough.

Elevated valuations in tech and AI stocks, resulting in concentration among a few stocks, were the key themes of 2025. The bond market, too, had a volatile year, and further interest rate volatility could influence bond prices and returns. To thrive in today’s landscape, investors should consider realigning their diversification strategies to focus on resilience across asset classes, factors, and risk exposures, and avoid an overreliance on simple asset class categorization as a means of diversification. It’s less about owning a lot, and more about being intentional with what you own—and why.

What does diversification mean in today’s landscape?

Diversification is no longer just about balancing stocks and bonds. In an era defined by tech disruption, geopolitical shifts, and complex risks, modern portfolio strategy requires investors to consider additional factors.

• Broader diversification across assets: A portfolio may consist of private markets, real assets, alternatives, and select global opportunities of value, alongside traditional domestic investments. This broader approach can help mitigate correlation risks and potentially offer additional diversification benefits, especially in volatile market environments.
• Smarter global exposure: Identifying and capitalizing on opportunities across diverse countries and regions, as pockets of global opportunities arise, supported by improving macroeconomic trends and favourable policies. However, investors must keep a keen eye on policy divergence and local/geopolitical risks.
• Risk-focused strategies: Proactively managing interest rate, inflation, and liquidity risks rather than relying on historical correlations as these factors continue to evolve with speed and complexity.
• Scenario planning and stress testing: Modeling worst-case scenarios and not just relying on past data to help prepare for tail events and market shocks.
• Time horizon and liquidity considerations: With longer lifespans and evolving retirement needs, investors must ensure their portfolios match liquidity profiles and future obligations. This can help ensure resilience across varying market conditions.

Why diversification is crucial

A few successes with a simple investment strategy can give investors a false sense of security, making them less likely to prepare for periods of unexpected volatility. It’s important not to underestimate the risks that can arise when a thoughtful and proactive approach to diversification is neglected. Among these risks are:

1        Rising correlations in risk-off events
During risk-off events, investors tend to rush to sell risky assets and move into safe haven assets. This can create simultaneous declines across asset classes as rising correlations temporarily undermine diversification benefits.

For example, during the 2022–2023 era of interest rate hikes, both bonds and stocks suffered as yields spiked. Similarly, events like the Global Financial Crisis of 2008, the COVID-19 market crash in 2020, and the banking turmoil in 2023 triggered broad-based selloffs, increasing correlations and collapsing diversification benefits.

2        Liquidity mismatches
Illiquid allocations can amplify stress when liquidity is needed most. Diversification isn’t just about return streams—it’s about balancing liquidity profiles to meet obligations and avoid forced sales. Even assets that are typically considered liquid can, at times, become illiquid or see transaction costs rise significantly.

For instance, during the COVID-19 market crash of 2020, U.S. Treasury yields spiked for a period as liquidity dried up. High-yield bonds have had several events over the past couple of decades where liquidity became thin during risk-off events due to dealers’ unwillingness to hold inventory and sellers’ unwillingness to accept the gap in bid/ask spreads.

Rebalancing and staying resilient

Ultimately, diversification is about building resilience across asset classes, risk exposures, and time horizons. By avoiding common pitfalls, embracing adaptive strategies, and maintaining discipline, investors can position themselves to weather what the future holds.

The most detrimental mistake investors can make is overreacting to market triggers by selling too quickly, buying too soon, attempting to time the market, or panicking during risk events.

The key is to adopt a disciplined approach and rebalance as necessary, whether quarterly, semiannual, annually, or dynamically. In our view, the best practice is to use a threshold-based approach with a dynamic time horizon, rebalancing when allocations drift beyond set bands, and utilizing major market moves as catalysts to revisit allocations.

Lastly, participating in annual reviews to ensure that target allocations still align with risk tolerance, lifestyle, and goals can help prepare for what’s to come.