Diversification is a fundamental principle in financial management—the concept is straightforward: avoid putting all your eggs in one basket. In early 2025, for example, the S&P 500 had dropped by more than 19%, while international markets, such as China and Europe, rose by over 15%, clearly illustrating the advantages of diversifying investments. However, challenges emerge when traditionally diversified assets—such as international equities, bonds, and domestic equities—move simultaneously in the same direction. We observed this in 2022 during a global collapse that affected nearly all asset classes, including debt instruments.

Historically, investors have relied heavily on diversification across
various asset classes and geographic regions to minimize portfolio volatility
and protect capital. While effective under normal market conditions, these
strategies can prove inadequate during widespread economic shocks when
correlations between traditionally diverse assets spike dramatically. This
unexpected convergence can lead to severe losses, undermining the very purpose
of diversification.

What if your portfolio could maintain diversified exposure while simultaneously providing downside protection for every position at no additional cost? (Refer to our “Investing with Zero Risk” article for details.) Defined outcome investing, primarily packaged and marketed as Exchange Traded Funds (ETFs), has seen significant growth. However, most of these ETFs are linked solely to the S&P 500, and their inherent fees often negate the potential benefits. Furthermore, their rigid structures limit investors’ ability to tailor risk and exposure according to their specific needs and market outlook.