Capital at Risk: The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
A balanced diet should include foods of many colors. If your shopping basket looks a bit beige, you’re probably not getting enough nutrients.
The same principles apply in the world of investing. We occasionally hear about a one-off ‘miracle’ investment whose price just keeps growing, but these opportunities are vanishingly rare. Their bubbles also tend to burst, much like tech stocks after the millennium.1
That’s why diversifying between stocks, bonds and other asset classes is important. The wider your diversification, the less likely you are to be affected when one stock takes a hit or there’s a general market downturn. In other words, a balanced diet keeps you in better shape for the long term.
Risk: Diversification and asset allocation may not fully protect you from market risk.
Being diversified means avoiding investments that all behave in the same way. For example, stocks and bonds have traditionally moved in opposite directions helping balance each other out.2 However, in recent years, rising inflation and interest rates have pushed them to move more closely together, reducing the protective benefits of a classic 60 stocks/40 bonds portfolio. In early 2025, for example, stock–bond correlations climbed above +0.6* compared to their strongly negative values during the zero-rate era3 (from late 2008 through about 2015 and during the COVID pandemic in some cases from 2020 to 2021). Likewise, bond repricing** in mid-2025 weighed heavily on equities.4 While a weaker US dollar can still lift gold prices*,5 and currencies often move in the opposite direction to domestic stock markets****, these dynamics are less reliable today.
Risk: Past performance is not a reliable indicator of current or future results.
* Correlation measures how two investments (e.g. stocks and bonds) move in relation to each other, on a scale from –1 to +1. A reading of +0.6 means stocks and bonds were moving in the same direction much of the time. By contrast, negative correlations (closer to –1) mean they typically move in opposite directions.
** When bond yields rise, the value of existing bonds falls. That tends to push down stock prices too because higher yields make bonds more attractive and raise borrowing costs for companies.
*** When the US dollar weakens, gold tends to become more attractive. Because gold is priced in dollars globally, a weaker dollar means it costs less in other currencies—this boosts foreign demand. Also, a weaker dollar reduces the opportunity cost of holding gold, since returns from dollar-denominated cash or bonds are often lower in those conditions.
**** When a country’s currency weakens, export-focused firms usually gain since their goods cost less abroad. The opposite happens when the currency strengthens — those firms can lose competitiveness and drag down the market.
So why does diversification matter? If you buy a portfolio of 100 UK companies, you might think you’re diversified and that if one stock falls it won’t affect the rest. However, if the stocks are in the same sector, they could all be affected by a single change to the law or an incident that spooks that market.
Even if your basket of shares includes a mix of sectors like pharmaceuticals, technology and industrial companies, you could still be at risk if corporation tax is raised for large businesses. That could shake confidence in their ability to keep generating profits and share prices may fall. In supermarket terms, it’s a bit like filling your basket with cheese, yoghurt, butter and cream – you still end up with too much dairy.
Now imagine a UK investor holding a mix of global shares and government bonds. Even with this broader spread, returns can still be affected by sudden shifts in exchange rates and bond yields. In 2025, for instance, rising UK gilt yields* and currency swings had a big impact on overseas investments.6 This shows that currency and bond risks can cut into returns, even in portfolios that look well-diversified on the surface.
* Gilts are bonds issued by the UK government. You lend the government money; in return, you receive regular interest payments and get your original amount back at maturity.
The key point is that diversification may help you achieve steady returns over the long term. Spreading your money between lots of different securities and asset classes reduces your risk profile. As a general rule of thumb, the greater the proportion of equities in a portfolio, the more volatile the investments could be and the greater the risk. Government bonds tend to be less risky but high yield or junk bonds* could be riskier than owning shares in very large blue-chip companies**, so investors must assess stocks and bonds on a case-by-case basis.
* Junk bonds (also called high-yield bonds) are corporate bonds issued by companies with below investment-grade credit ratings. Because the issuer is riskier, they pay higher interest to compensate investors, but there's also a greater chance of default. Default means a bond issuer fails to make a promised payment, either the regular interest or the return of the original money lent, when it’s supposed to.
** Blue-chip stocks are shares of large, well-known companies with strong financials, consistent profits, and a history of reliable performance.
Historically, a typical portfolio for an investor with a cautious attitude to risk contained about 60% equities and 40% bonds. But in today’s environment, this model is under pressure. Although gold and the US dollar remain common safe havens, gold ETFs surged by over 30% in 2025 as investors sought protection, showing that even traditional havens can deliver strong returns in the right context.7 That said, reliance solely on such assets may not suffice. Many investors are now looking beyond bullion to tools like inflation-linked bonds, short-dated Treasuries, and liquid alternatives to enhance diversification.8
Risk: Trading in derivatives on physical commodities is speculative and can be extremely volatile.
Market prices of derivatives on physical commodities can fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships (whether actual, perceived, anticipated, unanticipated or unrealised), weather, trade, fiscal, monetary and exchange control programs, political and economic events and policies, disease, pestilence, technological developments, changes in interest rates, whether by government action or market movements, and monetary and other governmental policies. The current or “spot” prices of physical commodities may also affect, in a volatile and inconsistent manner, the prices of futures contracts in respect of the relevant commodity.
Asset classes don’t always behave as expected of course. Recall how oil prices collapsed during the 2020 pandemic from $70 per barrel to near $10.9 Europe rebounded after the 2008 financial crisis, yet the 2022 invasion of Ukraine caused prolonged energy shocks and double-digit inflation. A more down-to-earth example: global coffee prices soared nearly 39% in 2024 due to adverse weather, and early 2025 saw further increases—Arabica up another 20%—driven by drought, shipping disruptions and tariffs10. These everyday commodities, from oil to coffee, show how markets can directly affect both portfolios and household budgets. Through such turmoil, diversified portfolios still offer the best chance to weather uncertainty.
References
1. Lessons for today’s tech boom 25 years on from dotcom burst, Portfolio Adviser, 10 March 2025, https://portfolio-adviser.com/lessons-for-todays-tech-boom-25-years-on-from-dotcom-bust/#:~:text=Reflecting%20on%20the%20dotcom%20bubble,clicks'%20and%20'eyeballs'.
2. They Move in Mysterious Ways – Stocks vs. Bonds, Russell Investments. https://russellinvestments.com/content/dam/ri/files/au/en-br/insights/russell-research/2025/Stocks-Versus-Bonds_AUS.pdf, 14 June 2025
3. Morningstar, What rising interest rates mean for stock–bond correlations, March 2025
4. AP News, Bond repricing drags equities lower, 5 July 2025
5. World Gold Council, Gold Mid-Year Outlook 2025 https://www.gold.org/goldhub/research/gold-mid-year-outlook-2025, 15 July 2025
6. The Guardian, Global bond sell-off hits UK gilts and pound, 3 September 2025
7. MarketWatch, Gold surges as 60/40 portfolio falters, May 2025
8. MarketWatch, How investors are diversifying beyond gold and bonds, 29 May 2025
9. Oil Market Report - August 2025, https://www.iea.org/reports/oil-market-report-august-2025, August 2025
10. FAO, Adverse climatic conditions drive coffee prices to highest level in years, March 2025; The Washington Post, Coffee inflation and tariffs keep prices high, February 2025; Standard, Lavazza warns on rising coffee prices, February 2025; Reuters, Brazil’s coffee farmers turn to irrigation, March 2025; The Guardian, Extreme weather and food price volatility, February 2025.
