Diversification feels boring—until markets fall: What investors are missing

The latest data shared by Zerodha’s Nithin Kamath highlights a structural flaw in the ‘equity-only’ SIP cult.

“No one can predict which asset class will do well. For 99% of people, the best thing to do is diversify and stay invested during the good times and the bad,” says Kamath.

It sounds like the kind of advice investors have heard for years—sensible, familiar, and easy to ignore. Yet the data he shared alongside that statement makes it harder to dismiss. Because it shows something most investors don’t like to confront: even disciplined investing can go wrong if the portfolio itself is poorly constructed.

And right now, that is exactly what’s happening.

The illusion of safety

Systematic Investment Plans (SIPs) have become the default strategy for retail investors. They remove the stress of timing markets and enforce discipline. Over long periods, they work.

But SIPs are not a shield against everything.

They answer the question of when to invest. They don’t answer the question of what to invest in.

Kamath’s chart, which tracks rolling 2-year SIP returns across asset classes, shows that equity-heavy portfolios—despite regular investing—have recently delivered negative returns. Broad market indices such as the Nifty 500 and Nifty Largemidcap 250 are down by roughly 7–9% on a 2-year SIP basis.

For many investors, especially those who entered markets after 2020, this is unfamiliar territory. The expectation was simple: stay invested, and returns will follow. That expectation is now being tested.

What actually worked

If equities struggled, what didn’t?

A simple equal allocation across equity, debt, and gold delivered close to 18%. Even a slightly equity-heavy mix stayed comfortably positive. Debt — often dismissed as low-return — quietly delivered mid-single-digit gains.

None of these portfolios would have looked exciting a year or two ago. That’s precisely the point.

Markets rarely reward what feels obvious in the moment. They tend to reward what looks unnecessary — until it suddenly isn’t.

The problem isn’t knowledge. It is behaviour

Ask any investor whether diversification is important, and the answer is almost always yes.

Look at their portfolio, and the answer is often no.

This gap between belief and behaviour is where most investing mistakes originate. Portfolios become equity-heavy after a rally. Defensive assets get ignored when they appear to be underperforming. Allocation decisions are made not by design, but by recent experience.

It’s not irrational. It’s human.

But it does mean that most investors end up doing the same thing at the same time—just as cycles are about to turn.

Why diversification feels unnecessary—until it doesn’t

In rising markets, diversification can feel like a drag. A pure equity portfolio will almost always outperform a balanced one during strong bull runs. That creates a subtle pressure to simplify—to go all in on what’s working.

The problem shows up later.

When markets correct, concentrated portfolios fall harder. Not just in value, but in confidence. Investors begin to question the strategy, pause SIPs, or exit altogether. What was meant to be a long-term plan gets disrupted by short-term discomfort.

Diversification doesn’t eliminate losses. It changes their shape.

Drawdowns tend to be shallower. Recoveries tend to be steadier. And that often makes the difference between staying invested and stepping out at the wrong time.

The quiet role of “unexciting” assets

Debt and gold rarely get the attention equities do. They don’t feature in conversations about multibaggers or rapid wealth creation. In strong markets, they feel like dead weight.

But their role is not to excite. It is to stabilise.

Debt provides predictability—income, lower volatility, and a buffer when equities weaken. Gold behaves differently. It tends to respond to macro uncertainty, currency movements, and global risk, factors that don’t always align with equity performance.

Individually, they may not stand out. Together, alongside equities, they create balance.

And balance, over time, tends to outperform conviction.

The shift that needs to happen

Most investors approach markets with a forward-looking question: what will do well next?

That instinct feels natural. It is also the wrong starting point.

If one accepts Kamath’s premise—that predicting asset class performance consistently is near impossible—then strategy cannot rely on prediction.

It must rely on structure.

That means deciding allocation not on what is expected to outperform, but on what is needed to manage uncertainty. It means accepting that parts of the portfolio will underperform at any given time, and resisting the urge to constantly fix them.

This approach is less exciting. It is also more durable.

What this looks like in practice

A diversified approach is not complicated. But it does require intent.

• Allocating across equity, debt, and gold based on risk tolerance
• Reviewing the portfolio periodically—not reactively
• Rebalancing when allocations drift, rather than when markets move

And perhaps most importantly, it means being comfortable with not having the “best-performing” portfolio at all times, as chasing that outcome is often what leads to underperformance.

The harder truth

Kamath’s post resonates not because it introduces a new idea, but because it highlights an old one that remains inconvenient.

Investors like to believe they can adapt quickly—shift allocations, capture upside, avoid downside. Sometimes they can. Most of the time, they can’t do it consistently.

Over shorter periods, even disciplined strategies like SIPs can produce disappointing results if tied to a single asset class. Diversified portfolios, while less dramatic, tend to hold up better.

The difference isn’t intelligence or access to information. It is the acceptance of uncertainty.

The bottom line

Diversification has always been easy to understand and hard to follow.

In strong markets, it feels unnecessary. In weak markets, it feels insufficient. Over time, it proves essential.

Kamath’s line stays with you because it strips investing down to something simple and slightly uncomfortable: No one really knows what will work next.

And if that is true, then the goal is not to be right every time. It is to build a portfolio that doesn’t depend on being right.

For most investors, that may not sound exciting. But it is what keeps them in the game long enough for investing to actually work.