Investment Strategy
The end of easy diversification: Positioning for what comes next
Key takeaways:
- Stocks are breaking records, but deep-seated risks—like persistent inflation, global fragmentation, and government gridlock—mean investors must look beyond short-term headlines.
- Structural forces are redefining the world order and fuelling creative disruption across industries. Economic nationalism, fiscal activism, and technological acceleration are changing how assets move together and where returns are found.
- The traditional 60/40 portfolio may offer less protection than before—diversification now demands more adaptability, global reach, and a broader toolkit. Alternatives are essential, not optional.
It’s been a masterclass in market contradiction: optimism and anxiety colliding in real time.
Fresh warnings—from geopolitical flare-ups to government gridlock—dominate the headlines, yet stocks are smashing through all-time highs.
Staying invested is still essential, but so is taking action. The ground beneath markets is shifting, and those who adapt thoughtfully can turn volatility into opportunity.
Below, we explore the risks behind the rally, the silver linings in a changing landscape, and why addressing portfolio vulnerabilities now is critical—before complacency becomes costly.
1. Act now: record highs, but real risks
Last week was a snapshot of 2025’s contradictions—where short-term strength and long-term uncertainty coexist.
Global stocks hit new highs—the S&P 500, Euro Stoxx 50, and Japan’s TOPIX all advanced—while 10-year Treasury yields briefly dipped below 4%. A delayed but cooler-than-expected US inflation print added fuel, with core CPI easing to 3.0% year-on-year—its lowest since June. That seemed to cement a Fed rate cut this week. A strong start to Q3 earnings season added momentum, as over 80% of S&P 500 companies are so far beating expectations.
Yet confidence remains fragile. The US government shutdown is now nearing a month, doubts about AI’s staying power persist, and geopolitical flashpoints—from renewed Russian sanctions to tenuous trade talks—keep volatility close at hand. Economic and political cycles are growing more intertwined.
Still, this hasn’t been a reckless rally. Investors have focused on quality and largely avoided the “unprofitable growth” manias of the past. Our own approach has leaned towards companies with robust earnings in tech, financials, and industrials, high-quality fixed income as a buffer, and alternatives to cushion volatility.
Altogether, we think this signals the start of a new regime, not complacency. The same forces lifting markets—economic nationalism, fiscal activism, and technological acceleration—are also redrawing the boundaries of risk. Understanding that duality is the foundation for what comes next.
2. Seize the shift: Finding silver linings
The next decade will likely favour those who adapt, not those who stand still. The just-released 30th anniversary edition of J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions highlights a market in flux—where the traditional stock-bond mix may not offer the same level of resilience as before. Three powerful forces are reshaping the landscape:
Economic nationalism is redrawing global relationships. Trade barriers are rising, immigration is tightening, and US GDP growth is projected to slow to 1.8% a year over the next 10–15 years—halving its lead over Europe versus last year’s estimates. The dollar remains about 10% overvalued, while the euro is expected to gain 0.6% per year. Global diversification and active currency management are now critical.
Fiscal activism is reshaping policy. Governments are rolling out massive stimulus—Germany passed a historic €1 trillion spending bill. Meanwhile, large global corporates are sitting on $4.6 trillion in cash that could be deployed. This spending supports growth but also fuels debt and inflation, which are expected to stay above central bank targets and remain volatile. That leaves cash a costly comfort: US cash returns are expected at just 3.1%,1 the lowest among major asset classes. At the same time, stocks and bonds are likely to show a positive correlation, meaning the classic 60/40 portfolio may pack less of a defensive punch. Alternatives like gold and hedge funds stand out as essential sources of diversification and alpha.
Technological acceleration continues to reshape returns. US large caps are forecast to deliver 6.7% annualised gains (in US-dollar terms). But the next wave of innovation is staying private longer—the median tech IPO is now five times larger and six years older than in the 1990s. Private equity sits where structural growth meets cyclical recovery: the long-term AI buildout may align with a budding pickup in dealmaking as valuations reset and $2.7 trillion in dry powder is deployed. Manager selection will be decisive as dispersion widens. Infrastructure, too, is evolving—from inflation hedge to growth engine—driven by investment in energy, digital capacity, and security.
Together, these shifts demand portfolios built for agility. But common portfolio pitfalls can catch even seasoned investors off guard.
3. Portfolio pitfalls: Complacency can be costly
Periods of transformation test investors’ ability to adapt. Creative destruction is picking up pace—and the UK, home to one of the world’s oldest stock markets, is a prime example.
In the five years since COVID, more than 130 companies have exited the FTSE All-Share Index, underscoring how quickly both business models and entire industries can fade and shift. Our just-updated study, The Agony & Ecstasy: The Risks and Rewards of a Concentrated Stock Position, dives into 40 years of stock market history, tracking each of the more than 2,200 UK companies that have featured in the index, to discern the lessons of risk and return.
The message: it’s more likely to invest in a losing company than many think. In the past four decades, over 40% of UK shares suffered catastrophic losses—down 70% or more, never to recover. More than 60% lagged behind the index, and about 40% delivered negative lifetime returns—meaning cash would have been a safer bet. Those losses hit hardest—and were potentially devastating—for investors with outsized, concentrated positions.
Many of these failures were driven by forces outside management’s control—policy changes, regulation, commodity swings, foreign competition, or shifting consumer tastes. Meanwhile, true ‘megawinners’ have been rare: just over 10% of UK shares beat the index by more than 500%, and even some of those companies faced long periods of stress or stagnation during their lifetimes.
The lesson: conviction should be paired with adaptability. The risks of standing still—or betting too heavily on a single winner—are real.
What it means for you
Fortunes can be made and lost where risk and reward collide. In markets defined by competing forces and structural change, diversification, disciplined rebalancing, and an awareness of concentration risk can turn volatility from threat into opportunity. Stocks can fuel growth, bonds may offer stability, and alternatives can bring resilience. Together, this brings us to three key considerations:
1) Make alternatives essential, not optional
Pulling from the LTCMAs, a classic 60/40 portfolio is expected to deliver 6.4% a year, but adding 30% in alternatives—private equity, real estate, infrastructure, hedge funds—could boost returns to 6.9% and sharpen the risk-reward trade-off by a quarter.2
2) Go global and manage currency risk
As US growth converges with the rest of the world and the dollar looks set to weaken, global diversification and active currency management are key to keeping returns on track.
3) Invest in secular change and innovation
We see the best opportunities in companies and sectors with pricing power, robust margins, and exposure to long-term trends like AI, global security, and the energy transition. But not all will thrive—active management will likely be crucial as creative disruption powers on.
By broadening your approach, looking beyond borders, and preparing for uncertainty, investors can find opportunity in change—and build portfolios that are ready not just to weather the next cycle, but shape it.
1 Returns shown are in US dollars.
2 A “60/40” portfolio refers to an allocation made up of 60% ACWI (the MSCI All Country World Index) and 40% US Aggregate Bonds (the Bloomberg US Aggregate Index). A “60/40” with 30% alternatives is comprised of 40% ACWI, 30% US aggregate bonds, 7.5% private equity, 7.5% real estate, 7.5% real assets, 4.5% private credit, and 3% hedge funds. Allocations to alternative assets will vary significantly depending on individual investor objectives and risk tolerance.
KEY RISKS
All market and economic data as of October 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
- The price of equity securities may rise or fall due to the changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time.
- Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk.
- Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
- Investments in commodities may have greater volatility than investments in traditional securities. The value of commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in commodities creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
JPMAM LONG-TERM CAPITAL MARKET ASSUMPTIONS
Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.
“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.
Important Information
Shifting economic landscapes bring new challenges—but also silver linings. A new era is redefining what it means to be diversified.
Madison Faller
Global Investment Strategist
Published Oct 27, 2025
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