President Donald Trump finally announced the details of his ‘reciprocal’ tariff plan on a day he dubbed ‘Liberation Day’. The next morning US stock markets reacted with the biggest one-day selloff since the early days of the Covid pandemic.

At the beginning of this year, US equities were one of the only markets in the world which had posted gains in the period since Trump’s election last November. 

This was on the hope that many of Trump’s stated policy aims – such as trade tariffs and immigration reform – would give way to a greater focus on market-beneficial deregulation and tax cuts. In addition, big US technology firms looked set to continue to dominate the artificial intelligence (AI) revolution. 

But even before ‘Liberation Day’, these assumptions had begun to unravel. US policy had instead prioritised tariffs – shaking up alliances and migration to create great uncertainty in the US and beyond. Elsewhere, a Chinese tech company, DeepSeek, forced investors to question assumptions about US tech leadership.

‘Free lunch’

‘Diversification is the only free lunch’ in investing is a quote that’s attributed to the US Nobel Prize-winning economist, Harry Markowitz.

Markowitz is perhaps best known for his work on modern portfolio theory, which emphasises the importance of diversifying your portfolio to reduce risk and enhance returns. 

With market concentration in the US having become increasingly pronounced over the past decade (see Chart 1) we think it’s now time for greater diversification.

Here are three ways in which investors can diversify their portfolios:

Diversification by region

Global ‘de-risking’ in 2024 led to a drop in investors' allocations to emerging markets – averaging 4.8% in early 2025, down from 7.9% in 2017 [1]. In today's uncertain world, Asia is becoming more attractive as a place to invest. 

Diversification by size  

It has been well documented how a handful of the biggest companies have driven returns in developed markets – with just eight stocks responsible for 50% of global ‘large-cap’ returns in 2024. 

But the sheer number and diversity of smaller companies mean it’s impossible for a handful of names – no matter how well they perform – to drive an entire index comprising companies with smaller capitalisations, or ‘small-caps’ (see Chart 3). 

This diversity makes small-caps an ideal area to invest for those looking for funds with a high active share – a measure of how much a portfolio's holdings differ from its benchmark index – and lower correlation to large caps. 

Adding smaller companies to a portfolio is typically seen as adding risk. However, we believe that in the current market environment, investors need to add uncorrelated stocks to ensure they are taking advantage of diversification opportunities.

Diversification by theme 

AI and tech have dominated market sentiment for some time. At one point, the weighting of the 'Magnificent 7' companies in global indices was greater than the combined weight of companies representing the next seven nations (see Chart 4). 

Against this backdrop, there is a strong case to be made that investors should seek to actively diversify their exposure to different themes. 

For example, one theme could be ‘future minerals’. This theme allows investors to gain exposure to the basic materials that are vital to the modern world – investing in the companies that extract, process, and/or recycle these materials taps into some long-term structural trends such as:

The last three months have certainly reinforced the strategic importance of critical minerals. It is notable that a key demand of the US administration from a Ukraine peace deal is access to the country’s mined resources, including lithium, graphite, rare earths, manganese, titanium and uranium. 

It also appears that the US’s desire for control of Greenland is motivated by ensuring it has control of mineral deposits or at least retain access to those minerals. While some of these geopolitical moves may appear extreme, they are evidence of the importance of these resources.