Portfolio diversification might sound like a chore, but it’s worth the effort in 2026, given how dominant the artificial intelligence…
Portfolio diversification might sound like a chore, but it’s worth the effort in 2026, given how dominant the artificial intelligence trade was last year. Without some smart diversification, your “just fine” investment portfolio from 2025 may be vulnerable in 2026.
“Investors don’t have to think there’s an AI bubble to be concerned about the concentration risk that AI has wrought,” says Morningstar Indexes strategist Dan Lefkovitz. “Concentration … leaves investors holding a market portfolio less diversified than in the past—by stock, sector, and theme.”
Here are five smart ways to diversify your investment portfolio in 2026.
Diversify your portfolio by rebalancing
Rebalancing is a way of restoring the original level of diversification you established. If you haven’t rebalanced in recent years, your portfolio is likely overweight in US stocks relative to bonds.
“A portfolio that started with a 60% weighting in stocks and 40% in bonds 10 years ago would now contain more than 80% in stocks,” calculates Morningstar portfolio strategist Amy Arnott.
Take a look at your current exposure to international stocks, too: Is it lower than your original target? Probably. “Even though stocks from outside the United States pulled ahead in 2025, that followed on the heels of a long run of outperformance for the US,” says Arnott. “As a result, your portfolio might still be light on international exposure.”
Add bonds for portfolio diversification
Financial professionals often say that investors in accumulation mode with many years until retirement don’t need bonds.
“If you’re over 50, I think you want to be realistic about de-risking a portion of your portfolio,” says Morningstar director of personal finance and retirement planning Christine Benz. “I like the idea of building a bulwark of safer assets, probably high-quality short- and intermediate-term bonds, plus a little bit of cash.”
In her model portfolios for retirement savers, Benz suggests a 5% bond allocation for savers with 35-40 years until retirement. That ramps up to a 20% bond weighting once retirement is 20 years out.
And if an investor of any age is looking to diversify a US stock portfolio, bonds—specifically, high-quality bonds—are an excellent choice, says Benz. Even a small position in bonds provides diversification that can dampen volatility in a portfolio.
Allocate to international stocks for diversity
Despite their 2025 revival, the performance of international stocks has still lagged that of US stocks over the past decade. That suggests non-US stocks likely have more gas left in the tank even after their runup last year.
Moreover, non-US stock markets are less tied to technology and the AI trade and thereby provide diversification away from the trend that has driven so much of the US stock market’s return during the past several years.
“Spreading one’s bets across geography can be seen as prudent risk management,” says Lefkovitz. “The US represents just 25% of the global economy but 63% of its stock market value. Given that imbalance, an all-US equity portfolio reflects real home-market bias.”
Boost value and small-cap exposure to diversify
Investors who own a diversified US index fund, whether one tracking the S&P 500 or a total market index, have a decidedly large-cap emphasis in their portfolio. They also have a heady dose of exposure to the AI theme.
To offset some of the concentration risk posed by the US stock market today, investors might consider allocating some assets to smaller companies or value stocks—or diversifying into both via a small-value fund or exchange-traded fund.
“Small-cap value has kind of persistently underperformed the large-cap growth stocks, and I think that arguably there’s a pretty good value there, so investors might do a little bit of repositioning so they’re not so heavily tilted toward those mega-cap growth and technology stocks,” suggests Benz.
Incorporate dividend stocks for variety
Dividend stocks typically cluster in the utilities, consumer, healthcare, industrials, and financials sectors, which often perform well when tech doesn’t. Moreover, they tend to be less volatile than non-dividend-paying stocks, and they possess defensive characteristics, which is a benefit during times of market stress.
There are many strong dividend stock-focused ETFs and funds to choose from, including Schwab US Dividend Equity ETF ( SCHD ) and Vanguard Dividend Appreciation ETF ( VIG ).
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance.
Susan Dziubinski is an investment specialist for Morningstar and co-host of “The Morning Filter” podcast.
Links:
Morningstar’s Guide to Portfolio Diversification
https://www.morningstar.com/portfolios/morningstars-guide-portfolio-diversification
The Best Funds to Rebalance Your Portfolio in 2026
https://www.morningstar.com/funds/best-funds-rebalance-your-portfolio-2026
5 Mistakes to Avoid With Your Investment Portfolio in 2026
https://www.morningstar.com/portfolios/5-mistakes-avoid-with-your-investment-portfolio-2026
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