Investors are urged to diversify their portfolios in 2026 due to the dominance of artificial intelligence in 2025, which poses concentration risk. Morningstar’s Dan Lefkovitz warns that the top 10 AI-related companies now make up 36% of the Morningstar US Market Index, up from 23% five years ago.

Diversification involves spreading investments across various asset classes to capture opportunities and reduce risk. While tools like market-neutral or managed futures exist, a blend of stocks and bonds suffices for most investors. Morningstar’s Jeff Ptak advises caution with oddball funds that can harm if not understood.

Five smart ways to diversify your portfolio for 2026 include rebalancing, adding bonds, allocating to international stocks, boosting value and small-cap exposure, and incorporating dividend stocks. Rebalancing restores diversification levels, while bonds offer stability. International stocks and value/small-cap exposure provide diversification away from AI dominance.

Investors should consider adding bonds to their portfolios, especially those over 50 years old. Morningstar’s Christine Benz recommends a gradual increase in bond allocation as retirement nears. Bonds, particularly high-quality ones, provide diversification from stocks. Even a small bond position can reduce portfolio volatility, but overdiversification is cautioned.

International stocks offer diversification away from US tech-heavy portfolios. Despite a 2025 revival, non-US stocks have underperformed US stocks over the past decade, suggesting further potential. Lefkovitz advises spreading investments globally for prudent risk management and to counterbalance the US-heavy global stock market.

To offset concentration risk from US stocks, investors can boost value and small-cap exposure. Allocating assets to smaller companies or value stocks via a fund helps diversify portfolios. Small-cap value stocks may offer a good value proposition compared to large-cap growth stocks, providing a hedge against market trends.

Incorporating dividend stocks can provide diversification and stability. These stocks, which often cluster in old economy sectors, perform well when tech stocks struggle. Dividend-paying stocks are less volatile due to predictable earnings and defensive characteristics. ETFs like SCHD and VIG offer diversified exposure to dividend stocks.

Read more at Morningstar: 5 Smart Ways to Diversify Your Portfolio for 2026