Estimated reading time: 11 minutes
When it comes to building a resilient investment portfolio, one word often stands out: Diversification. But while many investors recognize its importance, not everyone knows how to diversify properly, or the different dimensions involved.
In this blog, I’ll break down what diversification really means, why it’s more critical than ever (especially in volatile markets), and the four major types of diversification you must understand if you want to maximize your returns and minimize risks. If you’re serious about making your US stock portfolio stronger and more future-proof, this article is for you.
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TABLE OF CONTENTS
Diversification: What It Is and Why It Matters
In simple terms, diversification is about spreading your investments across different asset classes, industries, regions, and even company sizes, so that a single economic shock doesn’t wipe out your portfolio.
You might be wondering: why do we need to diversify? Well, let’s refresh your memory with some major events from history:
- The Dotcom Bubble (2000)
- The Subprime Mortgage Crisis (2008)
- The US-China Trade War (2018 – 2019)
- The COVID-19 Pandemic (2020)
Basically, each of these events happened because investors were blindsided, being too heavily concentrated in one sector, asset class, or market. A diversified portfolio helps smooth out returns over time, because when one asset underperforms, another might offset the loss.
In short, diversification leads to more consistent and less volatile returns across different economic cycles.
To really see why diversification matters, you’ve got to understand how different markets react during different economic cycles. That’s where the Market Overview feature on the moomoo app comes in handy, you can get a quick, real-time snapshot of global indices like the Dow Jones, Nasdaq, and major Asian markets. It also includes a dynamic heat map and sector performance breakdown to help you easily spot trends, sector leaders, and laggards.
Besides, their News & Earnings Hub delivers curated financial headlines, real-time stock updates, and earnings reports all in one place. You can browse breaking news, track market-moving stories, follow personalized watchlists, and monitor quarterly earnings from major companies like Microsoft, Apple, and Meta. It’s a powerful tool to stay informed and react quickly to critical market events.
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Asset Class Diversification
Usually, when people think about investing, stocks are the first thing that pops into their heads. But here’s the thing – stocks are just one part of the bigger picture.
To put it simply, different asset classes perform differently depending on market conditions:
- Stocks tend to outperform during economic expansions.
- Bonds offer stability during recessions.
- Commodities like gold thrive during periods of inflation or geopolitical uncertainty.
- Even cash, while not entirely risk-free, provides liquidity.
For example, while tech stocks soared after 2020, bond ETFs like AGG and BND provided shelter during periods of high volatility.
Similarly, gold prices hit an all-time high during the recent trade war tensions, acting as a safe-haven asset.
Here’s a helpful tip. You don’t need to pick individual bonds or buy physical gold bars. Instead, ETFs like AGG (for bonds) and GLD (for gold) make it easy to gain exposure while keeping costs low.
Therefore, it’s good to build a multi-asset portfolio, not just focus on stocks.
Geography Diversification
While the US stock market (NYSE, Nasdaq) is the largest globally at over $46 trillion market cap, putting all your eggs in the US basket is risky.
Imagine if there’s a domestic recession, policy shifts (such as tariffs or regulations), or currency depreciation, all of these could badly hurt a US-focused portfolio. That’s why global diversification helps spread your bets across different markets, such as:
- Europe (Euronext)
- China (Shanghai and Shenzhen)
- India (NSE)
- Japan (Tokyo Stock Exchange)
For your reference, here are a few ETFs with country diversification to consider:
Through these, you’re exposed to opportunities beyond the US, helping ensure you’re not overly reliant on a single economy.
If you want comprehensive ETF data, you can access a full suite of tools on the moomoo app in just seconds. Track real-time prices, view performance charts across timeframes, dive into sector and regional allocations, and easily access official fund documents like fact sheets and annual reports. It’s a streamlined way to research, analyze, and invest smarter, all from one screen.
Sector Diversification
Now, let’s move on to another type of diversification – sector diversification. This means that different sectors tend to thrive at different times, depending on where we are in the economic cycle:
- Technology and consumer discretionary often lead during expansions.
- Utilities and consumer staples tend to outperform during recessions.
For sector diversification, the key point is that economic cycles constantly shift. When they do, today’s top-performing sector could become tomorrow’s worst. That’s why it’s crucial to avoid over-concentrating in a single sector, even if it’s tempting to go “all in” on tech stocks during a bull run.
Here are some of the key US sectors and related ETFs, along with their historical performance as of 22 April 2025.
The key here is to balance cyclical sectors with defensive sectors for more stable performance.
Company Size Diversification
It’s easy to see why many investors automatically flock to large-cap giants like Apple, Microsoft, and Amazon, because they are familiar, stable, and highly liquid. However, it’s also important to understand that companies are categorized into different market cap.
For your information, small-cap and mid-cap stocks can offer better growth opportunities, although they come with higher volatility and risk. In addition, here are some challenges to consider when investing in small-cap stocks:
- Higher volatility
- Less analyst coverage
- Greater bankruptcy risk
- Lower liquidity
But this doesn’t mean it’s all bad, as historically, small and mid-cap stocks have outperformed large-caps over longer periods (up to 2022), and their valuations tend to be more attractive.
However, trends have shifted recently. Since 2022, the S&P 500 (large-cap) has been outperforming small-caps again, serving as a reminder that performance leadership rotates when market sentiment shifts to favor highly innovative companies, such as Nvidia (NVDA).
To give you a better idea, here are some major ETFs for size diversification.
Conclusion: Diversification Isn’t a Luxury, It’s a Necessity
At the end of the day, financial markets are unpredictable, and diversification isn’t just a “nice to have”, it’s your insurance policy against the unknown. By diversifying your investments across different asset classes, geographies, sectors, and company sizes, you’re not only boosting your potential returns but also reducing the risk of major losses.
The good news is, with ETFs, building a well-diversified portfolio has never been simpler or more affordable, whether you’re just starting out or already an experienced investor. So if you haven’t properly diversified your US portfolio yet, now’s the perfect time to start.
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Moomoo MY is currently offering Welcome Rewards of up to *RM 1,900, and you can even get an additional RM 40 stock cash reward when you deposit using my exclusive KOL code “ZIET11”. Sign up now to claim yours!
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*T&Cs apply. All views expressed in this blog are the independent opinions of Ziet, which are not shared by Moomoo Securities Malaysia Sdn. Bhd. (“Moomoo MY”). No content shall be considered financial advice or recommendation. Moomoo MY links are included in this post, through which referrals are made and I may receive certain commissions. Please contact Moomoo MY for more information.
