Volatility ≠ Risk

Six Things You Should Know

1. Equity Markets – were up this week with U.S. stocks (S&P 500) increasing +1.20% while international stocks (EAFE) were up +0.75%.
2. Fixed Income Markets – were also up this week with investment grade bonds (AGG) rising +0.23% and high yield bonds (JNK) gaining +0.26%
3. Deficit Grows – The trade deficit gap grew by a staggering $70.3 billion in December, culminating in a full-year deficit of $901.5 billion. However, year-over-year exports are +6.3% while imports are down -2.6%, a sign economists may point to as positive going forward.
4. Fed Minutes – Most recent release from January meeting showed officials mostly agree interest rate cuts should be paused as the central bank monitors inflation, with some even suggesting rate hikes may be an option if necessary. One key area of division amongst officials centers on whether policy should prioritize fighting inflation or supporting the labor market going forward. This will be one of the last meetings with Jerome Powell at the helm before his term ends in May.
5. Cybersecurity Reminder- Scammers are increasingly using Remote Access Tools (RATs) along with phishing emails or texts to take control of devices like phones, tablets, and computers. Once installed, these tools can give cybercriminals access to sensitive information, including your Schwab accounts. These attacks can be hard to spot, so if something doesn’t feel right- like unusual account activity or suspicious messages- trust your instincts. If you sense suspicious activity, please call us immediately or report any concerns to Schwab at 800-515-2157. 
6. Key Insight – [VIDEO] With markets continuing to whip around, we walk through the important mental frameworks and concepts as it relates to volatility, as well as some basic structures to help you survive it. [ARTICLE] We walk through how volatility and risk differ a bit, the importance of diversification in making sure the former doesn’t become the latter, and why many investors today are far less diversified than they think they are.

Insights for Investors

By Tim Mitrovich

Volatility ≠ Risk

The cold, hard truth is that volatility is an inescapable part of the journey for investors. While most people will acknowledge this in moments of calm, the panicked decisions of many during times of market turbulence demonstrate that they have come to truly believe, or perhaps accept, this reality. 

That said, there are some other important truths that do qualify, or perhaps even mitigate, this truth that investors would do well to learn, embrace, and implement.  

We discuss the first two at greater length in the video above (see here), which are that a) volatility is not the same as risk, and b) proper plan and portfolio design can greatly reduce both volatility and risk.   

Part of that second truth around proper portfolio design is understanding the two primary definitions of diversification as well as how they differ. In short, the common use centers around diversifying (individual) holdings in case one should “go to zero,” while the other focuses on investing in a variety of asset classes to have exposure to assets that differ in their response to the same economic environment (i.e. they don’t all rise and/or fall at the same time).  

Moving past the simplistic first definition to the second is where most managers put their focus when it comes to portfolio construction. We’ve written about the need for true diversification many times in these pages (for example, August 18, 2023, September 15, 2023, January 26^th 2024, October 4^th, 2024, to share just a few).  

Actually employing true diversification is something that challenges many investors as well as advisors alike. The pull from home country bias, the fallacy of the familiar, chasing momentum plays (e.g. the Mag 7 in recent years), or simply refusing to evolve one’s approach because of what has worked in the past is a shortcoming for many.  

The team at Hartford Funds recently put out an excellent piece (see below) that is a must-read, highlighting the new current market environment, potentially dangerous conditions for many U.S.-only investors, and how broadening one’s definition of diversification is so critical.  

We bring over new clients all the time and see the typical work of the industry, which supports the Hartford’s findings. It is why we are so adamant on personalized planning empowered by portfolios that seek opportunities from around the world and beyond the traditional asset classes used by many.  

If you are not yet a client, or you know someone you care about, and you could use a second opinion on your allocation, we are here to help anytime. 

Have a wonderful weekend,  

Tim and the team at TEN Capital  

The Accidental Death of Diversification  

Publisher: The Hartford Funds 

Date: January 19, 2026  

By: Robert Armstrong, Matt Ko, Lewis Ratti, Dan Suzuki  

The classic 60/40 portfolio is now more concentrated than ever, but true diversification can still be revived. 

What You Need To Know  

• Portfolios built using traditional US stock and bond mixes are now much more concentrated, exposing investors to higher risk as both asset classes trade near historic highs.  

• The dominance of mega-cap US stocks and the weakening of bonds as a hedge have eroded diversification,¹ making portfolios more vulnerable to market volatility and regime shifts.  

• Investors can restore true diversification by broadening equity exposure beyond US large-caps and actively managing interest-rate and credit risks within fixed income.  

Ten years ago, allocating 60% to a broad US equity index and 40% to a core bond index resulted in a reasonably balanced portfolio: ownership of hundreds of American businesses hedged by a reliable fixed-income ballast. Today, the same allocation delivers something very different, with potentially far more risk: an equity position among the most concentrated in modern history, paired with a bond allocation that may no longer serve as a reliable hedge, leaving both sides of the portfolio heavily exposed to assets trading near historic highs. 

Portfolio Overload: The Rise of Mega-Cap Stocks  

Since the mid-1990s, the public-equity universe has quietly halved (FIGURE 1), and companies that do go public now tend to arrive older, larger, and past some of their fastest-growth years. At the same time, the S&P 500 Index² has grown dramatically more concentrated: the 10 largest stocks now represent nearly 40% of the Index’s market value and an even greater share of its daily fluctuations (FIGURE 2). 

With household equity allocations at all-time highs and US stocks dominating global market share, most portfolios have become a concentrated bet on a handful of US mega-cap growth stocks (FIGURE 3). 

Global Markets Begin to Challenge US Dominance  

Fundamental regime shifts often drive long-term changes in market leadership—and signs suggest this transition may already be underway. While the US has outperformed global peers over the past five years, its position in both 1- and 3-year performance rankings among major equity markets has been steadily slipping (FIGURE 4).

Fixed Income Faces Shifting Risks  

Historically, bonds have played a key role in diversifying portfolios by reducing the volatility of pure equity exposure. However, diversification weakens as correlations³ rise, and today’s stock-bond correlation may remain higher than above a three-decade high for at least two reasons:  

1.  Deglobalization and ballooning fiscal deficits could lead to a prolonged period of higher and more volatile inflation and interest rates. When supply-chain decisions are driven by politics and trade barriers rather than efficiency, costs rise (FIGURE 5). Combined with the shift from post-Global-Financial-Crisis austerity to fiscal excess, this increases the risk of future inflation and higher tax rates (FIGURE 6).  

2. Tight credit spreads⁴ for corporate bonds recently hit a 27-year low, leaving less upside if corporate fundamentals stay strong and more downside if they weaken, which often coincides with stock-market downturns. Over the last 30 years, investment-grade (IG) spreads have never sustainably fallen below 50 basis points (bps),⁵ but have routinely exceeded 200 bps during periods of credit stress (FIGURE 7). Tight spreads mean lower income and limited room for further tightening, reducing potential for capital appreciation. When spreads are narrow, corporate bonds behave more like Treasuries in calm markets and more like stocks in turbulent ones. This combination leaves investors exposed to the least attractive features of both asset classes.

Bonds Are Already in a New Regime  

The effects of these regime changes are already visible in the bond market. Until the late 1990s, stock market corrections were almost always accompanied by rising bond yields—in 15 out of 16 instances, or 94%. From the late 1990s through the COVID-19 pandemic, that relationship reversed, and bond prices typically rose during stock market corrections (14 out of 16 times), providing an effective equity hedge. For nearly five years now, however, inflation has remained well above the Federal Reserve’s (Fed) 2% target (FIGURE 8). Any loss of confidence in the Fed’s commitment to its inflation mandate in favor of political considerations could reinforce this trend.

Persistent high inflation has triggered another major shift in the stock-bond relationship: Similar to the pre-1990s era, bond prices have once again been falling alongside stocks during market corrections (FIGURE 9).

Reviving True Diversification in Today’s Portfolios  

The good news is that there’s a potential solution that doesn’t rely on bold forecasts or market timing: investors should consider broadening equity exposure and actively managing interest-rate and credit risk within fixed income.

Moving Beyond the Usual Suspects in Equity Investing  

Current discussions around market concentration often point to how a broader equity universe could potentially help moderate associated risks. This isn’t a call for the end of American exceptionalism or the collapse of the AI boom, but rather an acknowledgment that today’s extreme concentration has become a portfolio risk worth addressing.  

One way to broaden exposure is by recapturing the young, high-growth companies that historically went public early but now remain private longer. Within public markets, the most effective diversifiers are often the cheaper, under-owned segments. With attention focused on US large-cap growth stocks, areas such as international markets, small- and mid-caps, and value companies may offer more reasonable valuations and alpha6 opportunities—both public and private. 

Rethinking Bonds in Modern Portfolios  

As discussed earlier, bond investors face two key challenges: (1) bond prices can no longer be relied upon to rise when stocks fall, and (2) compensation for risk, measured by spreads, is historically low. A growing focus in fixed income is managing volatility and drawdowns, even as interest-rate directions shift. Unlike passive strategies that tend to buy more of what’s expensive and less of what’s cheap, a flexible, tax-aware approach may be advisable. Investors may want to consider:  

• Adding interest-rate exposure when yields are high (bonds are cheap) and trimming when yields are low (bonds are expensive), since higher yields may provide more income to cushion price declines.  

• Increasing credit risk when spreads are wide (higher compensation for risk) and reducing risk when spreads are narrow.  

In this new regime, disciplined active management of interest-rate and credit risk can help turn bonds from a liability into a portfolio stabilizer while still providing potential income.

Why Diversification Matters Most When It’s Overlooked  

Diversification hasn’t disappeared; it’s just been removed from the default settings of most portfolios. Restoring it doesn’t require brilliance or perfect timing. It simply takes discipline: spreading equity risk across regions, sizes, and styles instead of concentrating in a few names, and adopting a more active approach to managing interest-rate and credit risk within fixed income. In an era of record concentration and shifting regimes, that discipline is no longer optional. It’s the new definition of prudence.

Representative Indices for Figure 4:  

Australia is represented by the S&P/ASX 200 Index, which tracks the performance of the 200 largest companies on the Australian Securities Exchange, serving as Australia’s leading stock-market indicator.  
Canada is represented by the S&P/TSX Composite Index, which is Canada’s main benchmark, tracking roughly 250 of the largest companies on the Toronto Stock Exchange to reflect the broader Canadian economy.  
China is represented by the MSCI China Index, which captures the performance of large and mid-cap Chinese companies—including mainland and overseas listings—covering about 85% of the total investable Chinese market.  
France is represented by the CAC 40 Index, which represents the 40 largest and most actively traded companies on Euronext Paris, serving as the flagship French stock market indicator  
Germany is represented by the DAX Index, which tracks the performance of the 40 largest and most liquid German companies listed on the Frankfurt Stock Exchange.  
India is represented by the Sensex Index, which is a benchmark of 30 of the most valuable and actively traded stocks on the Bombay Stock Exchange, representing India’s economy.  
Japan is represented by the MSCI Japan Index, which tracks the performance of large and mid-sized publicly traded Japanese companies, representing about 85% of Japanese stock market value  
Korea is represented by the KOSPI Index, which measures the performance of all common shares listed on the Korea Exchange, weighted by their market values.  
Switzerland is represented by the Swiss Market Index, which reflects how the 20 largest and most actively traded Swiss companies perform on the SIX Swiss Exchange.  
Taiwan is represented by the Taiwan Taiex Index, which measures the price movement of all (non-preferred) stocks listed on the Taiwan Stock Exchange, weighted by their market value.  
UK is represented by the MSCI UK Index, which measures the performance of large and mid-sized publicly traded UK companies, covering roughly 85% of the country’s stock market.  
US is represented by the S&P 500 Index. 

¹ Diversification does not ensure a profit or protect against a loss in a declining market.

² S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.  

³ Correlation is a statistical measure of how two investments move in relation to each other. A correlation of 1.0 indicates the investments have historically moved in the same direction; a correlation of -1.0 means the investments have historically moved in opposite directions; and a correlation of 0 indicates no historical relationship in the movement of the investments.  

⁴ Spreads are the difference in yields between two fixed-income securities with the same maturity but originating from different investment sectors.  

⁵ A basis point is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.  

⁶ Alpha measures an investment’s excess return relative to a benchmark index.  

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or  in a particular geographic region or country. • Small- and mid-cap securities can have greater risks and volatility than large-cap securities. Focusing on one or more sectors may increase volatility and risk of loss if adverse developments occur.  

The views expressed herein are those of Schroders Investment Management, are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Schroders Investment Management or Hartford Funds. 

From the Hartford Funds (Link: https://www.hartfordfunds.com/insights/market-perspectives/global-macro-analysis/the-accidental-death-of-diversification.html)  

Data, Just the Data

• U.S. Jobless Claims – initial claims fell by 23,000 to 206,000 last week, well below expected levels. Continuing claims on the other hand inched up by 17,000 to 1,869,000. 

• U.S. Industrial Production – rose 0.7% month-over-month in January for the sharpest gain since February of last year. Year-over-year production now sits at 2.3%. 

• U.S. Durable Goods Orders – fell 1.4% month-over-month in December following an upward revision to 5.4% for November’s reading. Despite this 2025 was strong, with new orders rising 7.8% for the calendar year. 

• U.S. Housing Starts – rose 6.2% in December to a seasonally adjusted rate of 1.404 million, almost 70,000 greater than expected. Starts are now at their highest levels since July.