What is diversification?
February 2026
Diversification involves spreading investments across securities or asset classes to reduce dependence on a single category. This can help optimize investment performance in volatile markets.
Charting a steady course
The table below shows how multiple stock and bond indexes performed over 10 years. While it’s tempting to chase categories that have double‑digit gains, note that many of those same categories experienced double‑digit losses in other years. The brown boxes show how a diversified portfolio with a 60% stock/40% bond allocation performed each year over the 10‑year period. The diversified portfolio had only two years of negative performance and still outperformed many other sectors in those down years.
| Representative Index | Asset Class/Sector | Diversified Portfolio Allocation |
|---|---|---|
| Russell 1000 Index (R1000) | U.S. Equity Large‑Cap | 36% |
| Russell 2000 Index (R2000) | U.S. Equity Small‑Cap | 6% |
| MSCI EAFE Index (EAFE) | Developed International Equity | 15% |
| MSCI EM (Emerging Markets) Index (EM) | Emerging Markets Equity | 3% |
| Bloomberg U.S. Aggregate Bond Index (USAgg) | U.S. Investment‑Grade Bonds | 28% |
| Bloomberg Global High Yield Index (GHY) | High Yield Bonds | 4% |
| Bloomberg Global Agg. Ex‑USD Bond Index (GxUSDB) | International Bonds | 4% |
| J.P. Morgan EM Bond Index Global (EMB) | Emerging Market Bonds | 4% |
| Diversified Portfolio (DP) | Asset Allocation | - |
The diversified portfolio assumes the following weights: 60% stocks and 40% bonds represented by the indices above and assumes monthly rebalancing. Data as of 12/31/25. Diversification cannot assure a profit or protect against loss in a declining market.
(Fig. 1) No one can predict which asset classes will be in favor
Source: T. Rowe Price
Past performance cannot guarantee future results. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Manage risk while pursuing returns
A diversified portfolio can help cushion losses in poor‑performing asset classes while benefiting from gains in others. This is especially important considering how unpredictable asset class performance is from year to year.
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