What Can Kevin Bacon Teach Us About the Market? More Than You Might Think

Most people know Kevin Bacon, not just for his most famous roles in “Footloose,” “Animal House,” “JFK,” or “Apollo 13,” but also for the pop-culture game Six Degrees of Kevin Bacon, which claims that any actor can be connected to him in six steps or fewer. It’s seemingly just for fun, but this quirky trivia game actually offers real-life lessons for your investment portfolio, especially when it comes to portfolio diversification.

Just like actors in Hollywood, the assets in your investment portfolio are often more connected than they appear on the surface. That’s where the concept of diversification becomes crucial. When different investments move in unison, a downturn can ripple across your entire portfolio. But when you understand how assets correlate (or don’t) to the broader market and to each other, you can implement a more resilient financial strategy to diversify your portfolio. The good news is, you don’t need a Ph.D. in finance to do it. You already have access to the tools and resources you need to diversify smartly and confidently, with the best brokers and robo-advisors.

Market Interconnectedness—The Kevin Bacon Effect

Kevin Bacon unintentionally became the poster child for this network theory in 1994 when a group of college students created the game Six Degrees of Kevin Bacon, which illustrates how many actors Bacon was surprisingly interconnected with through shared film roles. This concept that everyone, and everything, is part of a larger web of relationships has since found real-world applications across several fields. In the financial world, this same principle applies to how markets function: Assets that appear unrelated are often more closely linked than many investors realize.

For example, technology stocks Apple, Meta, and Nvidia provide different products and services and often have very different direct customers. However, their stocks often move in sync because they’re influenced by shared market forces, such as interest rates, consumer spending, laws, regulations, and investor sentiment. Similarly, emerging market equities can react sharply to decisions made by the U.S. Federal Reserve, even though the companies are not part of the U.S. economy. Those emerging market stocks often even react similarly to U.S. stocks. That can magnify a broad market upturn, but it also can amplify risk during market downturns, catching investors off guard. Understanding these links is a key to true diversification—and it starts with recognizing that the investments in your portfolio might be more connected than you thought.

The Art of Diversification

Many investors assume they’re well-diversified simply because they hold a lot of stocks. But if their stocks all come from the same sector, such as tech, they’re likely more exposed than they think to risks that bedevil that industry group. That’s because diversification isn’t just about the number of investments; it’s about their correlation—how similarly they move in response to market conditions. Owning 20 different tech companies may feel diverse, but it’s really very similar to owning just a single tech sector mutual fund that holds about 20 stocks. If inflation spikes or interest rates rise, chances are, all 20 stocks could drop in tandem. True diversification means spreading investments across different asset classes, market sectors, geographic markets, investment types, and company sizes that don’t move in lockstep.

In times of market panic, correlations across even seemingly unrelated sectors often surge toward what statisticians often refer to as +1.00, meaning all of the stocks in the universe that are being considered fall together. We saw this vividly during the 2008 financial crisis and again in 2020 amid the COVID-19 pandemic crash, when global stocks, bonds, and even gold briefly sold off in unison. These moments underscore the importance of diversifying not just by stock, but by sector, geography, asset class, and so on. A truly diversified portfolio can help cushion the blow when markets drop and help you stay the course with greater confidence.

Building a Bacon-Free Portfolio

A resilient and well-balanced portfolio includes a mix of sectors, such as technology, health care, industrials, energy, and consumer staples, while also incorporating volatility hedges like bonds or cash equivalents and alternatives such as real estate or commodities. Investors should also think in terms of asset classes—blending stocks, bonds, commodities, and REITs, and even a variety of different investment vehicles such as individual securities, mutual funds, and ETFs to help buffer a portfolio against market shocks. Geographic diversity is equally important, including exposure to U.S., international, and emerging markets, which can reduce reliance on any one country’s economy. Additionally, balancing growth and value stocks, as well as small-cap and large-cap companies, can help you weather the potentially stomach-churning ups and downs of different market cycles.

To build this kind of broad exposure, individual investors can use powerful tools from the best brokers, including free stock screeners, which can help you identify securities by factors such as sector, region, and market cap. Robo-advisors can automate a diversified investment strategy based on your goals and risk tolerance. The key is to spread risk thoughtfully so that no single event can derail your long-term financial goals.

The Bottom Line

Much like the unexpected connections that are revealed in the Kevin Bacon game, the assets in your portfolio are often more intertwined than they initially appear, and recognizing those hidden links is a vital key to smart investing. Portfolio diversification requires more than owning a handful of stocks. It requires a thoughtful mix of sectors, asset classes, geographic markets, investment styles (such as growth and value), various-sized stocks, and even different investment vehicles such as individual stocks, bonds, mutual funds, and ETFs. Correlations can spike during market turmoil, so spreading your risk across a diversified mix of assets helps protect your portfolio when it matters most. By understanding how everything is interconnected, you’ll be better prepared for market ups and downs—and more confident in your long-term financial future.