UBS Says Diversification Is ‘Most Robust Defense’ Amid AI-Driven Market Volatility

UBS stated in a note this week that recent AI-related disruption concerns have triggered sharp market swings, noting that estimated losses have exceeded $1 trillion, according to Deutsche Bank.

Unlike earlier periods of tech turbulence, UBS noted that the latest “repricing has extended to a wider net of sectors,” including software, legal services, logistics, insurance, and commercial real estate.

UBS commented that investors now need to stay “nimble” and respond to the “creative destruction” that technological innovation brings. But the firm emphasized that “with more broad-based volatility comes the renewed need for portfolio diversification.”

UBS said decades of research show diversification helps investors navigate wide dispersion between and within asset classes. The firm pointed to performance history showing that no single asset “consistently outperforms across all market cycles.”

While the MSCI AC World Index posted three straight years of gains above 20 percent through 2025, UBS noted such streaks are rare. It added that after the 1973 oil shock, the S&P 500 “required 6.6 years to recover its previous peak,” underscoring the need to hold multiple asset classes to reduce drawdowns.

UBS acknowledged that the effectiveness of diversification depends on how assets move together. It highlighted that 1–5-year U.S. government bonds have historically provided “modestly positive returns” when international equities declined, helping smooth portfolios during stress. High-quality government bonds remain preferred for their potential to rally in adverse scenarios.

UBS also encouraged expanding diversification into systematic strategies that adjust positioning based on macro signals, saying these approaches can reduce behavioral biases and improve risk-adjusted returns.

While diversification cannot eliminate risk, UBS said it “remains the most robust defense against the uncertainties” facing investors today.