Building a diversified portfolio of investments in a Stocks and Shares ISA can be a great thing. Investors, though, need to be proactive about doing this, rather than waiting until it’s too late.
When share prices are rising, it can be easy to become too concentrated in the names that are doing well. This, however, is exactly when it’s time to think about diversification.
Stock market rotation
For a long time, US shares have outperformed their UK counterparts. More specifically, the set of stocks known as the Magnificent Seven have generated outstanding returns.
These stocks looked like the only ones worth buying. And I’ve seen more than one fund manager that underperformed in 2024 put this down to not owning Nvidia shares.
In 2025, though, things have changed somewhat. Nvidia’s share price is down almost 20% since the start of the year and the rest of the Magnificent Seven are also down.
At the same time, the FTSE 100 has kept climbing. And both institutional and retail investors have started wondering whether it might be time to start diversifying away from US stocks.
In my view, the better time to think about reducing exposures to the likes of Nvidia was when it was at $150, not now that it’s fallen almost 33% from its 52-week highs.
Of course, investors weren’t so keen to sell Nvidia shares when the price kept going up. But this is the big diversification mistake that I’m hoping to avoid in my Stocks and Shares ISA.
What’s cheap right now?
Instead of shifting away from US stocks, I think now is a good time to be looking at S&P 500 stocks from a buying perspective. And this is especially true in certain sectors.
As a group, US-listed real estate investment trusts (REITs) have fallen around 6% over the last six months. But I think the sector is well worth looking at right now.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
One particularly interesting name is Alexandria Real Estate Equities (NYSE:ARE). The company owns and leases laboratory space to pharmaceuticals companies.
The stock has fallen 35% in the last six months and its latest earnings report was disappointing. In short, it’s having difficulties renewing or re-leasing its properties when contracts end.
This is partly the result of increased competition. But it’s worth noting that Alexandria’s 20 largest tenants are committed to leases that have an average of 10 years still to run.
The stock currently has a dividend yield of almost 8%, which is very unusual. So long-term investors might think this is a good time to take a look at the stock from a buying perspective.
Building a portfolio
It’s easy to put off thinking about diversification until stocks that have been doing well start falling, but by then it’s often too late. I think this is a situation where it’s best to be proactive.
That means figuring out where there are opportunities to buy stocks that are out of favour with the market. And the US REIT sector looks like a good example at the moment.
Alexandria Real Estate’s specialism means offers something different to other office REITs. And it could be an interesting choice to consider for investors looking to diversify a portfolio.
