Diversifying your portfolio in a time of global uncertainty

Revisiting diversification

At its core, diversification is a risk management strategy. The idea is straightforward: by investing in assets that do not move in lockstep, you can reduce the overall volatility of your portfolio and improve your chances of capturing steady returns. But in practice, diversification is more dynamic than simply spreading your investments across different asset classes.

The correlations between traditional asset classes are constantly shifting. Over the 24-month period from 2022 to 2023, correlations between the two major asset classes, stocks and bonds, rose to about 0.6, meaning their prices move somewhat in tandem, compared with a longer-term average near zero. Since the end of 2023, the historic relationship has largely returned to normal with the correlation between stocks and bonds returning to near zero* and re-establishing the complementary relationship between these asset classes. Importantly, in the stock market decline from late February to early April 2025, bonds acted as a diversifier and provided a positive return as an offset to stock losses. While considering options within asset classes may be beneficial, the foundation of diversification remains strong.

Broadening within asset classes

Even within public markets, global diversification matters. International equities, emerging markets and global fixed income may provide exposure to different economic drivers, central bank policies and currencies, which helps spread risk as the fortunes of various countries change over various time periods.

• Equities: Diversify across sectors, geographies (U.S., developed international, emerging markets) and market capitalizations. Some sectors—like utilities or consumer staples—may offer more defensive characteristics, while others—like technology or industrials—can drive growth in expansionary periods.
• Fixed Income: Explore duration, credit quality and geographic mix. Short-duration bonds may help mitigate interest rate risk, while investment-grade or municipal bonds can offer enhanced returns and tax advantages. In the current rate environment, bonds across the yield curve are providing returns above inflation and measurably higher than what we’ve experienced from 2009 through mid-2022.
• Cash & Equivalents: With today’s elevated short-term interest rates, strategic cash allocations can serve as a source of stability, dry powder for future opportunities and protection during drawdowns.

When asset classes excel—and when they don’t

Understanding when different asset classes tend to perform well—or poorly—is essential. For instance:

• Equities tend to thrive in periods of growth in regional economies but can suffer during recessions or when interest rates rise sharply.
• Fixed income traditionally provides stability, but rising inflation and interest rates can cause bond prices to fall.
• Real assets like real estate may perform well during inflationary periods.
• Foreign holdings can benefit from a generally falling exchange rate for the US Dollar but may be held back in periods of a rising US Dollar.

Why this is important now

Tariffs and geopolitical shifts have disrupted the flow of goods, creating ripple effects that affect companies and consumers differently depending on their region and industry. For example, U.S.-China trade tensions may simultaneously raise input costs for manufacturers and shift demand toward more domestically sourced goods.

With volatility now more common across both equities and fixed income, a well-diversified portfolio gives investors the ability to spread risk across different potential economic realities.

Personalization is key

No single approach can or should work for all investors. Diversification must be tailored to your personal goals, time horizon and tolerance for risk. A retiree seeking income and capital preservation likely needs a vastly different mix than a younger investor focused on long-term growth.

The process we seek to employ with clients at all stages of their financial life and any size of assets follows this broad outline:

• Use the financial planning process and tools to identify the client's goals.
• Create an asset mix to address those goals as well as the client's risk tolerance and capacity.
• Execute or recommend the portfolio construction and regular, disciplined rebalancing.
• Adapt to both the changing situation of the client and shifts in the market environment.

All investors’ circumstances are unique, and your diversification strategy may vary from another’s, but it’s important to understand the concept and why your investment professional may employ or recommend one strategy versus another. If you have questions or would like to schedule an appointment, please contact an Associated Bank Private Wealth financial professional.

The Bottom Line

Global uncertainty is not going away—but it doesn’t have to derail your investment goals. In fact, times like these underscore the importance of thoughtful, intentional diversification. By balancing the tried-and-true foundation of diversification with a broad set of asset classes and sub-classes in a holistic process, you can build a portfolio that is better positioned to navigate a wide range of market conditions.

*Correlation data is from Morningstar, Bloomberg.