Why We Diversify

At a recent portfolio review, a client asked a question we hear in different forms all the time: “If the S&P 500 keeps dominating, why should I bother diversifying?”

It’s a fair question. After over fifteen years in which U.S. mega-cap stocks drove most of the market’s returns, diversification can feel unnecessary—even frustrating at times.

2025 finally reminded us why we diversify. International stocks outperformed U.S. markets by the widest margin in more than three decades. Bonds generated real income again. Gold had a remarkable year outperforming all major asset classes. And the principles we’ve built portfolios around—balance, valuation discipline, and broad diversification—were rewarded in ways they haven’t been for some time.

So was it luck to stay the course? No. It was the result of a disciplined process and a deliberate effort to avoid getting greedy after years of strong U.S. stock market performance. While we often emphasize the value of diversification during down markets for U.S. equities, its benefits aren’t limited to difficult periods. Diversification can add value across a wide range of environments—and 2025 was a clear example of why we consistently follow a disciplined approach.

When Leadership Broadens

Last year, we spent time discussing how U.S. equity markets had become unusually concentrated. A narrow group of companies was responsible for a disproportionate share of returns, and valuations reflected that enthusiasm. At the same time, international markets traded at meaningful discounts to their U.S. counterparts—the kind of valuation gap that historically has not tended to persist indefinitely.

In 2025, that gap began to close.

International developed and emerging market equities delivered their strongest relative performance versus U.S. stocks in more than 30 years. Importantly, this wasn’t a story about U.S. markets performing poorly—the S&P 500 still posted a solid gain. Rather, it was a reminder that markets outside the U.S. can matter again, particularly when starting valuations are more attractive and global conditions begin to shift.

For clients who stayed diversified through years when it felt like “everything that mattered” was U.S. mega-cap growth, this year was a useful reminder of why patience and discipline matter.

U.S. Equities: Returns With Growing Tradeoffs

U.S. stocks once again delivered positive returns, but leadership remained remarkably narrow. The same small group of mega-cap companies continue to drive a large share of index performance, pushing concentration to levels not seen since the dot-com era.

Looking ahead, this is where we are more cautious. While we don’t believe U.S. large-cap stocks are inherently unattractive, we are skeptical that future returns will be driven by continued valuation multiple expansion. At today’s starting valuations, we believe returns are more likely to come from earnings growth rather than investors simply paying higher prices for the same stream of cash flows.

That perspective doesn’t call for abandoning U.S. equities—but it does argue for balance, selectivity, and realistic expectations, while also evaluating the opportunities elsewhere—such as small caps.

Small Caps: An Area of Growing Opportunity

Small-cap stocks finished 2025 higher, though the path was anything but smooth. Mid-year drawdowns reflected concerns around interest rates, economic growth, and policy uncertainty.

What caught our attention wasn’t just the volatility, but the valuation backdrop. Despite recent gains, small-cap stocks continue to trade at more reasonable valuations relative to large caps than they have in many years. While short-term rallies can sometimes be driven by lower-quality names, we see a growing opportunity set among fundamentally strong small companies that stand to benefit as economic conditions normalize.

As we look ahead to 2026, this is one area where we are increasingly constructive—with an emphasis on stock selection and quality companies.

Fixed Income: A More Flexible Opportunity Set

One of the more underappreciated shifts of the past two years has been the return of income as a meaningful contributor to fixed income returns.

In particular, we are optimistic about multi-sector bond strategies. With a wider range of yield opportunities across government, corporate, securitized, and inflation-linked bonds, managers today have far more flexibility than they did during the zero-rate era. That flexibility matters in an environment where inflation is moderating but not disappearing, and where interest rate expectations can change quickly.

Rather than stretching for yield in narrow parts of the market, we believe diversified, multi-sector approaches are well positioned to generate income while managing downside risk.

Alternatives and Gold: Supporting Portfolio Resilience

Gold was another notable contributor in 2025, benefiting from persistent inflation concerns, geopolitical uncertainty, and shifting expectations around monetary policy. Its performance served as a reminder of why alternative assets can play a role in portfolio construction—not to outperform equities every year, but to offer differentiated sources of return when traditional relationships break down.

As always, our use of alternatives is guided by one objective: improving the durability of portfolios across a wide range of market environments. Gold was a standout this year, but even within our alternative bucket, there are ample strategies to remain deeply diversified.

Looking Ahead—And Staying Connected

As we move into 2026, we remain thoughtful but optimistic. We see compelling opportunities in areas like small-cap equities and multi-sector fixed income, while remaining measured around parts of the market where expectations already appear stretched.

More importantly, we recognize that markets are only one part of the client experience.

Many of you have shared how much you value our responsiveness, accessibility, and relationship-first approach—especially during periods of uncertainty. We take that feedback seriously. Markets will always fluctuate, but our commitment to being available, proactive, and aligned with your goals does not.

The experience of 2025 reinforced why we structure portfolios the way we do—and why we believe staying engaged, disciplined, and connected matters just as much as any individual investment decision.