What if we get a slow-growth, weaker earnings economy in the second half of the year? Or what if it’s higher growth and higher prosperity? Either way, standing still may be the riskiest move.

After taking a hit in 2015, diversification proved its worth again in the first half of 2016. But a closer look at the catalysts for the recent success reminds us that the benefits of diversification have limits — and analysis of today’s market conditions suggests that investors should resist the urge to become complacent in their diversification strategy.

In sideways market environment marked by large price swings, investors need a way to navigate the round trip of drawdowns followed by recoveries. Broad diversification is the best tool investors have to influence the efficiency of their portfolios. The combination of milder downside capture and stronger upside capture holds the key to avoiding an investment result no better than “all that fun for nothing.”

The rocky start to the year corroborates our belief that 2015 marked a transition in the investment environment. We expect low returns and high volatility to continue in 2016. Two factors that help explain market outcomes in 2015 remain relevant in 2016: 1) financial assets aren’t cheap and 2) Fed tightening eliminates one of the greatest tailwinds for financial markets. Even in this new and challenging environment, we strongly believe that positive returns are achievable with the appropriate investment strategy. Active strategies deserve higher prominence.

Now is a good time to review strategies for improving overall portfolio efficiency and reducing or truncating downside risk. There are several strategies that are particularly well-suited for truncating downside risk. The third quarter reminds us that thinking about stability and resilience can be just as important as thinking about opportunity and profit.

If theres one thing investors agreed upon at the beginning of this year, it was that bond yields were heading higher. Over the past few weeks, I have read any number of research reports attempting to understand the reasons for this unexpected rally. Several plausible explanations have been offered, including the growing probability of a policy rate cut by the European Central Bank (ECB).

In 2013, both the S&P 500 Index and the yield on 10-year Treasury bonds finished the year at their highest levels of the calendar year. So ended a year when equity markets dominated the return landscape, while bonds and numerous other assets struggled. The environment apparently changed, though, with the turning of the calendar to 2014. In the New Year, bonds have performed quite well, with yields on 10-year Treasuries, as an example, falling from 3.03% to 2.67% so far this year. Stocks meanwhile, have been volatile, yet stand close to unchanged on a year to date basis.

For asset allocation decisions, we find great value in maintaining a long-term outlook for major asset classes. Twice a year, in fact, we conduct an extensive update of our five-year return forecasts for several asset classes. The purpose of this exercise is two-fold. First, taking a longer term perspective helps us to set strategic asset allocations and design portfolios for diverse investment goals.

When investors lose confidence in an asset class, especially one that had been popular enough to attract outsized allocations, subsequent rebalancing generally leads to prolonged periods of underperformance. Technology stocks after 1999, for example, underperformed the S&P 500 in eight of the next 10 years and by a cumulative total of more than 40 percentage points. Today, many believe that interest rate sensitive bonds might have just begun a similar era of waning investor confidence, portfolio reallocation and underperformance.

Two performance trends have stood out across world markets during 2013. The first is the strong outperformance by equities over bonds. The second is the strong returns of the U.S. stock market relative to other stock markets around the world. The Table breaks down year to date performance for the S&P 500, Eurostoxx 50, FTSE 100, Topix and MSCI Emerging Market indices. Notice that as of the end of July, equity returns in the Unites States were handily outpacing all other regions except Japan.

Last year in a white paper called Engineering a better retirement portfolio1, we demonstrated the long term benefits of investing with a balanced risk profile. Exhibit 1 shows the trailing Sharpe ratios reported in that paper for the S&P 500, a traditional balanced domestic 60/40 portfolio, and a risk balanced strategy invested to equalize the risk contribution from stocks, bonds and commodities. The message from that chart is clear: Better balance leads to more efficient portfolio performance over time.