Diversifying out of last year's winners? Advisors offer some overlooked options

More wealth managers are following baseball Hall of Famer Willie Keeler’s advice to “hit 'em where they ain't” when it comes to rotating client assets out of big-cap technology stocks and into other, less-owned, areas of the stock and bond markets.

Of course, this begs the question for advisors seeking to rebalance portfolios after such a magnificent run: ‘Where ain’t they?’

Tom Graff, chief investment officer at Facet, for example, really likes mid-cap stocks right now, calling the asset class the only segment of the U.S. market where valuations aren't stretched into the 90th percentile in recent history. He adds that mid-caps are also the kinds of companies large caps might buy up should there be a pick-up in M&A, which he thinks is likely if the economy stays steady.

“This is a segment that might really benefit if there is a rotation away from crowded trades in tech,” Graff said.

Rick Wedell, chief investment officer at RFG Advisory, agrees that the S&P 400 mid cap space is attractively valued versus other segments of the market, along with emerging market value. That said, he points out that it remains difficult to predict which segments of the market are going to under or outperform in any given 3 to 6-month period, particularly when the market is choppy.

“In general we are fans of returning to more normal levels of duration given the potential for downside volatility in the markets. You don’t want to be caught on the short end of the curve if employment continues to deteriorate,” Wedell said.

Elsewhere, Brent Coggins, chief investment officer at Triad Wealth Partners, highlights a change he made a few months ago towards value within his domestic equity allocations. And while it was not a dramatic shift, he says it has helped nonetheless as the spread between value and growth has “gapped out since November.”

Furthermore, he has also seen greater appetite for defined outcome strategies and buffered ETF investments, coming off the market’s strong multi-year run.

“Investors are looking for areas to protect capital as we enter what seems to be a heightened volatility regime,” Coggins said.

NOT CHEAP FOR CHEAP’S SAKE

When evaluating an overlooked opportunity, Facet’s Graff stresses he won’t buy a "cheap" asset that doesn't have any catalyst to turn around. In his opinion, that's how investors gets stuck in value traps. As a result, he tries to avoid “narrative-based positioning.”

“A simplistic narrative like ‘the dollar is going to drop’ or ‘AI is going to take over the world’ is so open-ended that you'll never know when to sell because the narrative has gone too far. The story can be part of your investment thesis, but it has to be backed up quantitatively,” Graff said.

RFG’s Rick Wedell, meanwhile, subscribes to the belief that diversification means always having to say, “I’m sorry.”

“In 2025, we owned growth, and it was amazing. And we also owned value, and ‘I’m sorry’.  You are never going to be able to predict which areas of the market are going to outperform consistently. Better to own all of it, wisely, and then just be prepared to offset your losers with your winners,” Wedell said.

Triad’s Coggins frames it another way, believing there are very few bad investment positions, but there can be a lot of bad position sizes.

“If we believe an asset that may be popular at the moment could merit a position in a portfolio, it's likely popular because it has momentum behind it and is thus at or near overvalued territory. To properly manage risk, we may introduce it but very incrementally. That way, if unintentional performance chasing happens, at least the damage is contained,” Coggins said.

'LETTING IT RIDE' RISK

As for the biggest risk investors face if they stay anchored to last year’s winning themes instead of reassessing where the market may be underestimating value in 2026, Graff points to the AI trade and precious metals. Both have had a lot of volatility to start 2026.

“With AI, I'm bullish on AI's long-term potential, but even a minor slowdown in the growth of capex could upend this trade. With precious metals, we saw even a whiff of dollar strength rapidly unwind the silver trade. I think this shows how many players in this trade are leveraged and therefore could be quick to sell,” Graff said.

Wedell notes the obvious concentration risks in the market but also highlights a changing economic landscape that could impact investors. Employment, consumer confidence, and the positioning of the Fed are all very different now than previously, which has implications for outside risks to the market. 

“Investors should never assume that the conditions that were favorable to a certain sector or sectors in the prior year will carry over,” Wedell said.

Finally, Coggins thinks the performance of the bond market in 2025 does not get talked about enough.

“The Agg was up over 7% with a 2% max drawdown and virtually no volatility - international bonds did even better. Inflation risk is very real. We have a regime change coming at the Fed, but at least with fixed income you know with a much higher degree of confidence what your return is going to be,” Coggins said.

Emphasized Coggins: “I get that it's not the most exciting theme, but I think it's a mistake if investors looking to de-risk don't at least consider traditional fixed income - a lot of parallels get drawn between this market and the dot-com bubble, when that burst good-old-fashioned bonds dramatically outperformed stocks for years.”