The AI boom has overshadowed a banner year for Wall Street's "old man trades": diversified returns hit a multi-year high.

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In the AI frenzy of 2025, diversified investment strategies delivered the strongest returns in years.

This week's inflation data underscored the value of diversification. On Thursday, U.S. inflation data came in below expectations, triggering a rare simultaneous rally in both stocks and bonds. Risk parity funds recorded gains for the week, reminding the market that balanced allocation can still generate returns in an AI-dominated investment environment.

Traditional stock-bond balanced portfolios have posted double-digit gains this year, marking the best performance since 2019. A global allocation fund under Cambria Investments, holding 29 ETFs, posted its best annual performance since inception, and multi-asset quantitative portfolios outperformed the S&P 500 Index.

Despite the strong performance of diversification strategies in 2025, capital continues to flow toward concentrated large-cap tech exposure and thematic trades. Some strategists warn that, at a time of high market valuations and deepening concentration, abandoning diversification could expose portfolios to risk at the wrong moment.

Investors Continue to Shun Balanced Strategies

In 2025, diversified investment strategies achieved their strongest performance in years, yet this accomplishment has been largely overlooked amid the AI boom.

Marko Papic, Chief Strategist at BCA Research, says:

Although all the attention is on the AI story, 2025 is not about stocks — the key is global diversified allocation.

2025 may mark the return of Wall Street's traditional cautious strategies, but this year investors have continued to sell out of these strategies.

According to JPMorgan data, balanced and multi-asset fund categories—including public risk parity funds and 60/40 portfolios—have seen outflows for 13 consecutive quarters, only experiencing a modest rebound this fall.

Funds continue migrating toward concentrated large-cap tech exposure, thematic trades from core energy to quantum computing, and direct hedging vehicles like gold.

JPMorgan strategist Nikolaos Panigirtzoglou attributes this to years of poor performance, compounded by abnormally high cross-asset correlations, which have eroded returns.

The bond market crash sparked by the Fed's aggressive tightening in 2022 further hurt investor confidence in fixed income as a buffer in cross-asset portfolios. Jim Bianco of Bianco Research says:

This destroyed retail investors' psychological expectations for the bond market. It's a key reason why investors keep jumping from one asset to another.

Rotation is Already Underway Beneath the Surface

This year, market breadth trends unfolded for much of the time.

Since many value stock ETFs have avoided excessive tech concentration, these ETFs attracted over $56 billion in inflows this year, the second-largest annual inflow since 2000. Cambria’s global value ETF surged about 50%, marking its best performance since inception.

At the same time, international stocks rebounded on fiscal reforms and a weaker dollar, while small cap stocks outperformed large caps in the fourth quarter.

Some strategists believe this shift will continue into 2026.

Greg Calnon, Co-Head of Global Public Market Investments at Goldman Sachs Asset Management, expects U.S. corporate earnings growth to broaden and sees strong performance for small caps and international stocks. He believes U.S. municipal bonds will remain robust, with attractive post-tax yields compared to Treasuries and strong investor demand.

David Lebovitz of JPMorgan Asset Management is tilting toward emerging market bonds and UK gilts, while maintaining selective exposure to U.S. equities and AI stocks.

Caution Signals Emerge

However, bubble signs are also being observed. Bank of America points out that 2025 is showing the second strongest dip-buying impulse in nearly a century.

Emily Roland, Co-Chief Investment Strategist at Manulife John Hancock Investments, says that the disconnect between the market and fundamentals is growing. She says:

This year has been a dream for short-term investors, and we'll remain cautious on recent junk stocks. It’s a momentum-driven year, and fundamentals and earnings growth seem irrelevant.

Although investors are giving up on the classic 60/40 allocation, many have not abandoned multi-asset approaches.

Funds are flowing into alternative assets—from private credit and infrastructure investments to hedge funds and digital assets. In some cases, what investors are after is no longer portfolio balance, but rather access to alternative assets, yield, or the ability to shield against public market volatility. JPMorgan's Lebovitz says:

They haven’t lost confidence, but 60/40 is evolving. It’s important to recognize that what worked over the past 25 years may not be as effective in the next 25 years. The core concept of diversification still holds, but investors now have more levers to pull.

Risk Disclosure & DisclaimerThe market involves risks, and investment should be approached cautiously. This article does not constitute personal investment advice and does not account for individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. You invest at your own risk. ```