Which is a better investment: buying a home or investing in stocks?
Since 1995, stock prices have outperformed home prices by a factor of four, but which is actually the better investment for building wealth?
For armchair investors and retirement savers, “diversification” has become much more meaningful than buying both stocks and bonds.
And “diversified” portfolios in the 2020s sense of the term did very well in 2025.
Morningstar estimates that the broadly diversified asset mix, which consists of 11 investment classes, will grow 18.3% in 2025.
That’s better than the return investors could get by investing in U.S. stocks alone, up about 17% year over year.
And that’s a much better return than what Morningstar tracks with a “plain vanilla” 60/40 portfolio of U.S. stocks and investment-grade bonds. This blend returned 13.3% in 2025.
In its April report titled “Diversification Outlook in 2026,” Morningstar looks back at a year that delivered strong returns for investors who diversified beyond the traditional mix of domestic stocks and bonds, particularly into gold and international stocks.
According to a Morningstar report, gold prices rose nearly 70% in 2025. Stocks outside the US rose more than 30%.
Last year was “a banner year for international diversification,” said Amy Arnott, Morningstar portfolio strategist and one of the report’s authors.
“Diversification” means more than stocks and bonds
There is a lot of talk in the investment community about broadening the definition of diversification in investing.
The Trump administration wants retirement savers to access alternative investments such as private equity, real estate, commodities and cryptocurrencies.
Investment experts are urging investors to look beyond U.S. stocks and bonds, warning against overreliance on mega-cap stocks.
For example, Vanguard predicts that value stocks, small-cap stocks, and some foreign stocks will outperform the Magnificent Seven’s growth stocks in the coming years.
The definition of a diversified portfolio has steadily expanded over the years.
Investopedia reports that the 60/40 rule evolved from economist Harry Markowitz’s 1950s work on the theory that investors should diversify to balance risk and return.
Half a century ago, a 60/40 portfolio might have contained only U.S. stocks and bonds. Today, even casual investors have easy access to many more categories of stocks and bonds, both domestic and international, as well as several other asset classes.
Diverse portfolio with 11 ingredients
In its April paper, Morningstar has constructed a diversified portfolio that includes the following elements:
- 20% are US large-cap stocks, representing the largest companies.
- 10% of non-US stocks in developed markets
- The share of non-US stocks in emerging markets is 10%
- 10% US Treasury Bills
- 10% US investment grade bonds
- 10% Global Bonds
- 10% high yield bond
- 5% small-cap stocks (representing small companies)
- 5% products
- 5% gold
- Real estate investment trust 5%
Many of these asset classes did well in 2025. The most notable one is gold.
“Essentially, people are buying stocks because they think they’re going to keep going up,” Arnott said. “And that’s definitely what we see in 2025.”
Developed market stocks outside the US rose 33% in 2025, while emerging market stocks rose 30%.
Arnott said foreign stocks performed well in part because the dollar was “very weak in 2025.” Returns on international stocks have increased as the dollar has weakened.
Is the 60/40 portfolio over?
This thesis seems to justify investors diversifying far beyond the traditional 60/40 portfolio.
Or maybe not. The paper also notes that the 60/40 portfolio performed admirably over a longer time span. In fact, the company consistently outperforms “diversified” portfolios.
Over the past three years, the 60/40 portfolio has grown an average of 15.4% per year, compared to 14% for the diversified portfolio. Over five years, 60/40 rose 8%, while the diversified portfolio gained 7%.
“When you zoom out, the classic 60/40 portfolio was very difficult to beat over the long term,” says Michelle Crum, a certified financial planner in Ann Arbor, Michigan.
Crum said diversification is “certainly important, but complexity doesn’t automatically mean better results.”
Are bonds making a comeback?
Many in the investment community have become dissatisfied with 60/40 portfolios, and bonds in general, in recent years. One of the reasons is what happens in 2022.
Bonds are supposed to be a hedge against stocks. When stocks fall, bonds rise, or at least don’t fall as much.
In 2022, it looked like the financial market would change completely. According to the S&P 500, stocks lost 18.6% of their value that year. Bonds also lost 13.7% of their value, according to the Vanguard Total Bond Market Index. Inflation pushed that number to 20%, making it the worst bond return in 97 years, according to Nasdaq analysis.
Bond funds went dormant in 2022 due to rising interest rates and inflation. This year has been “no doubt a very painful experience for a lot of people,” Arnott said.
But the bond has regained form and is doing its job.
“In a week like the first week of April 2025, stocks were down about 9%, while bonds were up about 1%,” Arnott said. “Overall, there were 25 weeks in 2025 with negative stock returns, and 21 of those 25 weeks with positive returns in investment-grade bonds.”
Arnott doesn’t suggest that everyday investors need to diversify across 11 different asset classes. But she also doesn’t think an all-stock portfolio is wise for most investors.
“In reality, the average investor probably wants something in between,” she says. “You don’t necessarily want to own commodities or gold or REITs, but you probably want to have some exposure to non-U.S. stocks.”
And some bonds.
