Diversification That Helps

TL;DR

• 100% U.S. stocks deliver the highest long-run growth in this illustration, but with deeper drawdowns.
• A basic mix of stocks + international + bonds smooths the ride and cuts worst losses, at the cost of some upside.
• The real edge is not microscopic optimization; it’s picking a mix you won’t abandon in the next ugly year.

Method

We compare a concentrated U.S. stock portfolio to a simple diversified mix, both built from broad index funds:

• 100% U.S. Stocks: 100% in a U.S. total market or S&P 500–style index (think SPY).
• Diversified Mix: 60% U.S. stocks, 20% international stocks, 20% investment-grade bonds, rebalanced once per year.

Data is modeled on monthly total returns (price + dividends) in USD, fees and taxes ignored. Both portfolios start at 1.00× and evolve using those returns.

This is an illustration of the trade-off, not a precise backtest of any specific ETFs or time window.

Notes

• Both portfolios are fully invested the whole time; only the mix differs.
• The diversified portfolio is rebalanced annually back to 60/20/20.
• Exact numbers will change with different start dates and instruments; the pattern is what matters.
• Educational only. Not personalized investment advice.

What the data says

In this kind of pattern, U.S. stocks pull ahead over time but hit deeper holes during bad periods. The diversified mix grows a bit slower but doesn’t fall as far when things break.

The important part isn’t that one line wins by a few percentage points. It’s that the diversified line keeps your drawdowns and worst 12-month periods at a level more people can tolerate without blowing up their plan.

The illustrative summary below lines up with the chart: higher CAGR and deeper pain for 100% stocks; lower CAGR and shallower pain for the mix.

When diversification really helps

• You’re not going to hold through a −30%+ drawdown without panicking.
• Your savings rate is strong; protecting the snowball matters more than squeezing every last percent of return.
• You want different economic drivers (U.S. vs international, stocks vs bonds) so your portfolio doesn’t hinge on a single country or asset.
• You prefer slightly lower returns that you can actually sit through over “optimal” returns you’re likely to abandon.

When diversification can feel disappointing

• You compare everything to the hottest recent performer on Twitter instead of your own needs and time horizon.
• You’re very young, comfortable with volatility, and your main risk is undershooting long-term growth.
• You hold so many overlapping funds that you effectively just own the same thing with extra fees.
• You expect diversification to “protect” you from every crash; it can reduce pain, not erase it.

Diversification is not about never losing money. It’s about shaping the distribution of outcomes into something you can live with for 10–30+ years.

Summary

Stylized numbers consistent with the chart. Real-world results depend on the exact funds, rebalancing rules, and time period used.