Strong market performance can create temptation.

Investors look at what worked most recently and quietly assume it will continue. Performance becomes a story, the story creates conviction, and conviction hardens into concentration.

The problem is that markets have never rewarded this behaviour for long.

The past year offered a textbook example. While headlines focused heavily on US equities and the dominance of a handful of mega-cap technology stocks, the reality underneath was far broader.

Emerging markets rose around 35 per cent, the UK delivered returns of roughly 26 per cent, and Europe, Asia Pacific and Japan all posted double-digit gains.

Equity returns were widely dispersed across regions, sectors and styles, rewarding investors who stayed globally diversified and punishing those who chased a single narrative.

This is precisely the moment when discipline matters most.

“This is precisely the moment when discipline matters most.”

The danger of extrapolating success

Post-performance narratives are powerful because they feel intuitive. It is easy to think strong performance.

But, more often, strong returns reflect expectations being priced in faster than reality can deliver.

History shows that the biggest allocation mistakes tend to follow periods of strong performance.

Investors increase exposure at higher valuations, reduce diversification and convince themselves that this time it is different.

This is diversification’s true strength. It does not require foresight. It requires humility.
Starting valuations matter. Markets that begin a period trading at elevated multiples tend to deliver lower long-term returns, even if short-term performance remains strong.

This is not because growth disappears, but because much of it has already been paid for.

Recent market behaviour reinforces this lesson.

Regions that entered the year on more modest valuations delivered competitive, and in some cases superior, returns. Performance did not cluster around a single geography. It spread across the global opportunity set.

Concentration is not new, or unusual

Apart from current global geopolitical tensions, much of today’s anxiety centres on US market concentration.

The numbers sound alarming. The ten largest stocks in the US account for roughly 37 per cent of market capitalisation. The top three represent around 19 per cent, with the single largest stock close to 7 per cent.

Viewed in isolation, those figures feel uncomfortable. But context matters.

Many other major markets like the UK, China, Canada, Australia, South Korea, France, Germany, Taiwan and Switzerland are even more concentrated than the US in their top 10, top three and largest stocks. Yet these markets rarely provoke the same alarm.
More importantly, concentrated returns are not an anomaly. They are the norm.

Research covering 42 countries and more than 64,000 companies over a 30-year period found that 71 per cent of companies failed to beat their local index.

More than half actually lost money over their lifetimes. The long-term return of equity markets has always been driven by a relatively small number of exceptional winners.

Technology dominance today looks no different from previous eras. The ‘nifty fifty’ in the 1960s, Japanese conglomerates in the 1980s, and energy stocks in the 2000s all inspired similar concern. The names change. The pattern persists.

“By maintaining exposure globally, across asset classes, investors can capture a broader opportunity set”

Diversification still does the heavy lifting

The response to concentration should not be avoidance. It should be breadth.

Diversification works not because it eliminates risk, but because it refuses to depend on a single source of return. Different regions respond differently to interest rates, currencies, fiscal policy and economic cycles. When one area disappoints, another often advances.

The past year demonstrated this clearly. Banks, industrials, defence, commodities and technology all contributed at different points. Value surged by around 40 per cent after years of underperformance. Momentum faded. Smaller companies rebounded.

None of this could be predicted reliably in advance, but diversified portfolios captured it regardless.

This is diversification’s true strength. It does not require foresight. It requires humility.

The market-timing trap

After strong performance, the instinctive question becomes whether it is time to rotate and reposition defensively.

But market timing requires getting two decisions right, when to exit and when to re-enter. The cost of getting either wrong is often substantial.

Long-term evidence is unforgiving; 153 years of US equity data shows a negative correlation of roughly minus 0.5 between earnings growth and price to earnings expansion over 10-year periods. Dividends, earnings growth and valuation changes rarely move in the same direction at the same time. Prediction becomes a fool’s errand.

This is how investors miss compound returns. This is how disciplined strategies are abandoned just before they would have proven their value.

Resisting the narrative

The irony is that many investors worried about US concentration are underweight the very areas that delivered strong diversification benefits. Emerging markets, European equities and value stocks continue to trade on far more reasonable valuations, around 13 times earnings in many cases, compared to roughly 24 times in the US.

Global diversification is not about avoiding the US, it is the world’s largest and most dynamic equity market after all, but it is about not relying on it exclusively.
It is about ensuring portfolios are not overly dependent on a single engine of returns at all.

As we have seen, different regions and sectors perform under different economic conditions, policy cycles and valuation starting points.

By maintaining exposure globally, across asset classes, investors can capture a broader opportunity set, reduce concentration risk and build more resilient portfolios that are better equipped to navigate shifting markets over time.

A portfolio weighted by global market capitalisation naturally captures leadership where it exists and automatically tilts towards other regions as relative valuations evolve. It does not require heroic calls or perfect timing.

Concentration anxiety is as understandable as it is human in nature. But investment success has never come from doing what feels comfortable. It comes from building portfolios that do not depend on any single market, sector or narrative to succeed.

The real danger is not concentration. It is believing that this time it’s different.