Back to school arrives in the US and after a tumultuous August, the market is looking to recover the losses of Black Monday on the promise of a rate cut by the Fed.
With the S&P 500 adding another 6% last month and accumulating 17% year-to-date with rate cuts just around the corner the J.P. Morgan Private Bank investment team offers an analysis of three principles to consider in the portfolio.
1. Know your toolkit: Each asset has a role to play
“If you’re looking to get top marks this year, having the right school supplies is likely the first step. From the trusty pencil to the elegant protractor, to the almighty graphing calculator, each item has a purpose. Your portfolio is no different. Whether it’s cash, stocks, bonds or alternative investments, each asset has a distinct role to play—and they work together to achieve your long-term goals,” the experts said.
Each investment has its own particularity:
- Cash:Everyone needs cash. From filling up the car tank to paying the down payment on a house, cash is king. Many also think of cash as a safe haven or even a source of income when interest rates are high. But cash is not designed to beat inflation. This means it’s equally important to think about how much you really need to have, and how much, if any, you can redirect to other types of investments to meet your goals.
- Bonds: Bonds Fixed income securities can provide investors with a degree of stability. The coupon payments distributed over time by bonds, in addition to repaying the initial loan amount, assist in reducing the uncertainty and volatility present in a portfolio. The principal risk associated with bonds is the possibility that the issuer will default on its repayment obligations. However, historical data indicates that defaults in investment-grade debt have been exceedingly rare. For instance, default rates for corporate bonds have remained at approximately 2.5% since the Great Financial Crisis, while those for municipal bonds have remained below 0.1%. Additionally, fixed income is expected to outperform cash and inflation, and it also tends to exhibit less volatility than equities.
- Stocks: Owning a stock entails a stake in a company and its future performance, including both positive and negative outcomes. Stockholders typically benefit from earnings growth and dividends paid by companies to reward shareholders. Since 1991, earnings and dividends have contributed almost all of the 3,205% total return for the S&P 500. Changes in valuation have driven less than 5% of the total return. Over time, equities are typically the engine of capital appreciation for portfolios, and they can provide the highest expected return, but this is accompanied by higher volatility.
- Alternatives and real assets: Hedge funds, private equity, private credit, and other real assets, such as real estate and commodities, can provide distinctive exposure to portfolios and enable investors to access more targeted exposures. Such an approach may potentially enhance returns while reducing volatility, but it may also entail the risk of longer-term investment lock-in.
“While each has a distinct role to play, the ultimate key to notching consistent returns over the long haul is diversification across asset classes and, of course, staying invested,” the experts advise.
2. Maintain a long-run mindset
Beyond having the right supplies, the next step to being teacher’s pet is having the right mindset. For investors, a long-run mindset, in particular, can help pave the way for success, the analysis says.
Recent volatility is a prime example that over the short term, different assets can have a wide range of possible outcomes. That said, history tells us that over the long term, the possibilities can be much more certain.
“So even though markets can always have a bad day, week, month or even year, history suggests investors are less likely to experience losses over longer periods—especially in a diversified portfolio. Above all, keep the time horizon of your goals in mind. A bucketing approach can be helpful to determine how and where to invest your money over various time periods,” the text adds.
3. It’s about time in the market, not timing the market
The next step on the road to valedictorian is staying out of trouble. Discipline can help us avoid falling victim to bad habits. For investors, one of the worst habits to have is trying to time the market.
Since the start of the year, we have seen the S&P 500 make almost 40 all-time highs. When market levels are elevated, it may lead some investors to feel like it is too late to get invested, which often keeps them on the sidelines in the hope of a pullback While we did see an -8.5% drawdown from July highs, trying to get the timing just right is a dangerous game to play.
For other investors, market pullbacks do not feel like an opportunity. Instead, the fear associated with them and the ensuing volatility may push them out of the market, causing them to miss the rebound on the other side.
The article by J.P. Morgan Private Bank can be found at the following link.
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