5 Smart Ways to Diversify Your Portfolio in 2026

Portfolio diversification took on renewed importance as investors head into 2026, following a year dominated by artificial intelligence investments that created significant market concentration risks.

“Investors don’t have to think there’s an AI bubble to be concerned about the concentration risk that AI has wrought,” explains Dan Lefkovitz, strategist at Morningstar Indexes. “Concentration leaves investors holding a market portfolio less diversified than in the past—by stock, sector, and theme.”

Financial experts are now urging investors to reassess their portfolios to ensure proper balance across asset classes, particularly after several years of tech-driven U.S. market outperformance. Without strategic diversification, even portfolios that performed adequately in 2025 could face vulnerabilities in the coming year.

Rebalancing stands as the first critical step toward proper diversification. Portfolios left untouched for years have likely drifted significantly from their initial allocations. Morningstar portfolio strategist Amy Arnott notes, “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.”

This natural drift often creates overexposure to U.S. equities, particularly in the tech sector. Despite international stocks showing signs of life in 2025, most portfolios remain underweight in global exposure after years of U.S. market dominance.

Bonds represent another crucial element for portfolio diversification, even for younger investors. Christine Benz, Morningstar’s director of personal finance and retirement planning, challenges the conventional wisdom that investors far from retirement don’t need fixed income exposure.

“If you’re over 50, I think you want to be realistic about de-risking a portion of your portfolio,” Benz advises. “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, Benz recommends even investors with 35-40 years until retirement maintain a modest 5% bond allocation, gradually increasing to 20% when retirement is 20 years away. These fixed-income positions can significantly dampen portfolio volatility, providing stability during market downturns.

International stocks present another avenue for diversification, particularly given their limited exposure to the AI trade that has dominated U.S. markets. Despite their 2025 revival, international equities have underperformed U.S. stocks over the past decade, suggesting potential for continued outperformance.

“Spreading one’s bets across geography can be seen as prudent risk management,” Lefkovitz notes. “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.”

Market analysts also recommend boosting exposure to value stocks and small-cap companies to offset the large-cap, technology-heavy composition of major U.S. indexes like the S&P 500. This approach provides a counterbalance to the concentration risk present in today’s market environment.

“Small-cap value has persistently underperformed large-cap growth stocks, and I think arguably there’s pretty good value there,” suggests Benz. “Investors might do a little bit of repositioning so they’re not so heavily tilted toward those mega-cap growth and technology stocks.”

Dividend-paying stocks offer yet another diversification avenue. Typically concentrated in utilities, consumer staples, healthcare, industrials, and financial sectors, these investments often perform well when technology stocks struggle. Their lower volatility and defensive characteristics provide added stability during market downturns.

Investors seeking dividend exposure can consider exchange-traded funds like Schwab US Dividend Equity ETF (SCHD) and Vanguard Dividend Appreciation ETF (VIG), both well-regarded options in this space.

As 2026 approaches, these diversification strategies take on particular importance given the unprecedented concentration in U.S. markets. By rebalancing portfolios, adding bonds, increasing international exposure, incorporating value and small-cap stocks, and investing in dividend-paying companies, investors can build more resilient portfolios capable of weathering various market conditions.