Market insights and analysis

By Jerry Wagner

Whether we are watching an exciting come-from-behind victory on the gridiron in the fall, a walk-off home run at a summer baseball game, or an exciting quadrennial relay race at the Olympics, the same pattern seems to unfold with regularity: Someone rushes off ahead of the pack, leads at the halfway mark, and then fades at the finish, being passed by an early lagging competitor.

In investing, it’s no different. A top-performing asset class one year may struggle the next, while last year’s underperformer can suddenly become the leader. Market cycles shift, and what looks like a sure bet one year can fall behind the next.

This tendency is even more pronounced with investment strategies. While asset classes trend (those that are doing well persist in their strength long enough to profit), our research shows that strategies have a tendency to revert to the mean. That means that this year’s winner can often become next year’s loser.

As with everything in investing, this is not a hard-and-fast rule. Sometimes a strategy will continue its success for many years in a row, but it’s uncommon.

The importance of multi-strategy diversification

Chasing past winners can lead to disappointment. A well-constructed portfolio isn’t just about picking what worked best last year—it’s about being prepared for different market environments. That’s why true diversification includes not just different asset classes but also multiple strategies designed to perform well under varying conditions.

A portfolio where everything is going up at the same time might feel reassuring, but it can also be a warning sign that it lacks diversification. When markets shift, that same portfolio could be vulnerable to a downturn. By blending strategies that respond differently to market conditions, investors can build a more resilient approach—one that isn’t dependent on yesterday’s winners continuing their streak.

Is your portfolio truly diversified?

In today’s unpredictable market, diversification is more important than ever. As recent market shifts have shown, leadership can change quickly, leaving investors exposed if they rely too heavily on a single trend or asset class. As we noted recently, rapid rotations in market leadership make it difficult to rely on past trends alone.

Building a well-diversified portfolio that incorporates multiple asset classes, strategies, and time horizons can help investors remain adaptable. By taking an approach that goes beyond traditional stock and bond allocations, investors can better prepare for different market scenarios—whether that means capturing upside potential or managing downside risk in times of volatility.