With Trump’s sweeping new tariffs reigniting fears of a full-scale trade war, investors will need to revisit their assumptions on risk and diversification with growing urgency.

In finance, few theories have enjoyed as much reverence or scrutiny-free longevity as Modern Portfolio Theory (MPT). Introduced by Harry Markowitz in the 1950s, its core idea was elegant: diversify across uncorrelated asset classes to reduce risk while optimising returns. But, if the 2008 crisis taught us anything, it is that diversification as defined by MPT is unlikely to protect you when it matters most.

I still recall my days at First National Bank of Chicago where I had the chance to work with Gary Brinson widely regarded as one of the investment world’s “living legends” and a pioneer of asset allocation. I have also been fortunate to engage in several stimulating conversations with William Sharpe, Nobel laureate and the pioneering mind behind the Capital Asset Pricing Model (CAPM).

Yet these foundational theories face hard truths. In moments of systemic stress, asset class correlations converge. All boats sink together. Theoretical models, built on assumptions of rational investors, limitless liquidity and stable market behaviour function well in academic bull markets but crack under the weight of real-world shocks, contagion and tariff-fuelled uncertainty.

The Trump tariffs are not just headlines. They are a live test of the fragility of our investment frameworks. If geopolitical triggers lead to simultaneous declines across equities, bonds, commodities, and currencies then just how “diversified” are we?

Like many others, I believe a fundamental rethink is overdue. Rather than spreading risk blindly, investors should anchor their strategies in familiarity by focusing on sectors, instruments and regions where they possess meaningful insight and can act decisively in a crisis. Simplicity, prudence and liquid optionality will trump (excuse the pun) theoretical optimisation every time.

As market sentiment shifts and volatility returns, now is the moment to re-examine the assumptions underlying so many portfolios. Diversification is not dead but it is far more conditional than we like to admit.

#tariffs #modernportfoliotheory #diversification #investmentstrategy #riskmanagement #geopolitics #marketvolatility #assetallocation