In today’s unpredictable political and economic climate, having a well-diversified investment portfolio is key to ensuring you’re not overly exposed to one sector or market. Here we discuss three diversification checks every investor should consider to help manage risk and build long-term resilience.
The Trump administration has heralded in a new era of chronic uncertainty – and investors need to be clear on how best to strengthen their portfolios in these unpredictable times.
The US president’s global tariff announcements on ‘Liberation Day’, 3 April, followed by numerous quick-fire row-backs and repositionings, make it impossible for investors (let alone policy makers or business leaders) to have confidence that what was the case yesterday will still apply tomorrow.
The chances are that Trump’s style of government will persist for much of his term of office, so although global markets have largely recovered over the past two months, further volatility would not be surprising.
Thus, with no clarity as to where next could be under political or economic attack, it makes sense to tune out of the short-term macroeconomic noise and focus on managing overall portfolio risk and increasing the chance of decent returns through broad diversification.
That way not only are you much less dependent on any single equity market, but you can also take advantage of the ongoing rotation as US market dominance declines and other regions demonstrate relative robustness.
Of course, the most effective portfolio diversification is about more than just a check of the geographical mix of stocks. It also involves sectoral spread within your equity allocation, plus a mix of asset classes to help reduce volatility further. Below we discuss these three diversification checks in more detail.
1. Geographical diversity
As Hugh Gimber, global market strategist at J.P. Morgan Asset Management, pointed out in a recent Money Makers podcast, the past couple of years are unusual in that they have seen diversification in the doghouse as an investment approach.
“It didn’t work for two years,” he says. “The best strategy in 2023 and 2024 would have been to hold a small number of very expensive US tech stocks and nothing else.”
This year, however, that’s no longer the case. With signs of a downturn for the US economy and the risk of higher inflation biting over coming months as import tariffs take effect, Gimber expects the rest of the world to outperform, led by Europe and (to a lesser extent) the UK.
The beauty of geographical diversification is enhanced not only by macroeconomic differences between regions, but also by the contrasting focuses shaping different economies.
To give a simple example, China’s economy is heavily driven by global trade, with 15% of exports going to the US as of end 2023¹. In contrast, much of India’s economic growth is rooted in rapid socioeconomic changes and increasing demand from its huge domestic market.
2. Sectoral diversity
Booming interest in AI and the dominance of the Magnificent Seven US tech stocks drove the US stock market in 2023 and 2024, with the Magnificent Seven contributing a whopping 52% of S&P 500 total net earnings growth in 2024².
But even before the powerful impact of rising trade tensions and tariffs, there were signs of a broader base to the US market’s performance so far in 2025: the Magnificent Seven’s contribution to S&P 500 total net earnings growth was forecast in March to fall to 33%².
Gimber comments that in recent months J.P.Morgan Asset Management’s US focus has been on more defensive sectors such as healthcare, utilities and staples, which have the capacity to produce relatively stable returns when times are difficult.
By choosing a high-quality, broad-based investment trust or fund, you should be able to feel confident that the management team will adjust their exposure to the different sectors within their remit as the relative risks and opportunities shift.
3. Asset classes
It’s generally accepted that if you compare mainstream asset classes over the long term, global equities provide the best chances of sustainable total returns. However, when crisis hits, economic decline bites and equity markets are falling, a multi-asset portfolio is likely to provide better protection.
In such circumstances, the prices of less risky assets, including government and corporate bonds and gold, tend to rise as investors seek safer havens for their money. Moreover, government bonds can provide protection against the risk of recession, as returns typically increase when governments reduce interest rates to stimulate growth.
Alternative assets such as infrastructure tend to have low correlation with equity fortunes, so they are typically relatively little affected by stock market movements altogether. Better still, returns may often be at least partially inflation-linked, providing additional protection.
So, a well-crafted portfolio for uncertain times is likely to include reasonable exposure to bonds and alternative assets: they may underperform stock markets in a bull market, but they provide valuable upside protection when equities are on the ropes.
Cash won’t cut the mustard
Importantly, while a retreat from investment risk altogether may feel like the safest option at such times, cash accounts are not a viable long-term solution because savings interest is so unlikely to keep pace with inflation.
The Barclays Equity-Gilt Study for 2024³ shows that over the past 20 years – which include the Great Financial Crisis, Brexit and the Covid pandemic – the UK stock market has produced total annual real returns (ahead of inflation) of 3.1%, while in the average cash savings account your money would have lost 1.8% in real value per year.
It’s also very difficult to time any return to the markets. A note on the subject from the Association of Investment Companies (AIC) provides a dramatic recent example⁴.
“If, on 5 April, an investor had decided they could take no more and cashed in their holdings, within four days they would have missed the biggest one-day rally since 2008, as the US market rose 9.5% in the immediate aftermath of Trump pausing the tariffs for 90 days.”
Missing those key days can be enormously costly. J.P.Morgan Asset Management research⁵ shows that an investor who missed the 10 best trading days over the 30 years to end 2023 would have reduced their average annual return from 9.9% to just 5.6%.
Diversification still has risks
It's important, of course, to recognise that diversification comes with no guarantees, so you’ll still see ups and downs in the value of your portfolio.
Nor is it a ‘set and forget’ strategy; portfolios need to be regularly monitored and rebalanced to ensure they don’t become skewed towards the most successful regions (and therefore more vulnerable to corrections) over time.
Remember also that it is possible to ‘over-extend’ unintentionally. Hold too many funds and the chances are that you’ll be duplicating holdings without realising, while the law of diminishing returns means you’re gaining little additional diversification benefit.
The use of a small number of contrasting investment trusts - say five to 10 – invested in professionally selected and monitored portfolios can be a simple and hassle-free way for many investors to achieve their diversification goals.
The key message for investors at what remains a challenging time for markets generally is to ensure they are well diversified in all three respects – for example, through the use of a multi-asset holding held alongside a broad-based portfolio of equity investments.
JPMorgan’s investment trust range includes a number of actively managed, high-quality trusts offering global or regional equity exposure, backed by a wealth of managerial expertise and resources.