The simplest diversification strategies are still the best, according to Morningstar’s 2021 Diversification Landscape report released Thursday.

After reviewing the results of diversification strategies for 2020, Morningstar concluded, “Despite the appeal of complex diversification methods that involve highly specialized asset classes, the simplest diversification strategies, such as adding Treasuries to an equity-heavy portfolio, fared the best” last year.

Unfortunately for investors, the Morningstar study also showed that correlations between asset classes often tend to increase during periods of market stress, “making diversification tough to find when investors need it most. This pattern held true in early 2020 as correlations spiked across most asset classes in the coronavirus-driven market downturn.”

The swift and severe market downturn at the beginning of last year due to the pandemic showed that basic, simple portfolio diversification can help buffer losses. The equity market dropped 34.5% from Feb. 19 through March 23, but high-quality fixed-income holdings held up well and cash and short-term Treasuries held their value, while longer-term Treasuries posted gains. “As a result, a basic portfolio mix of 60% stocks and 40% core bonds would have lost about 13 percentage points less than an equity-only portfolio during the market downdraft,” according to the report.

However, other asset classes saw mixed results. Gold excelled in its role as a safe haven and lost a modest 2.3% during the downturn and has rebounded strongly, while at the same time other commodities and REITs suffered sharp losses.

“Diversification strategies that worked in the past may not work in the future,” Morningstar said. For instance, “the past 20 years have been marked by declining interest rates and benign inflation. In a period of equity market weakness precipitated by rising yields, Treasuries and other high-quality bonds may be less reliable diversifiers, particularly given how low the yields are in absolute terms.”

Investors need to beware because every market cycle is different and “asset classes that hold up in one market may or may work in the next,” Morningstar warned. “Even so, the basic arguments in favor of diversification still hold. Holding a variety of asset classes helps guard against being overly exposed to an area that falls out of favor.”

Investors also need to be aware that during the last two decades, correlations have edged up for several asset classes, including commodities, corporate bonds, global bonds, high yield, REITs, and Treasury Inflation-Protected Securities. “Investors seeking out the benefits of diversification must therefore choose carefully,” the report advised.