Building on a balanced stock-bond portfolio—adding hedging—can make a difference under a range of different scenarios
Today, much of what defines the investing environment is in transition. With the economy and asset markets in flux, portfolios themselves may need to adjust.
Topping the list of how: Enhancing portfolio hedges by expanding the toolkit to include a greater range of investments that can potentially offset one another’s movements when the market backdrop shifts. Building even smarter portfolios to potentially better endure and prosper, through market shocks of different kinds.
In a word: Diversification.
You can discuss diversifying your holdings when you create or update your goals-based plan with your J.P. Morgan team. Diversification can be part of building an informed, customized investment plan that takes into account your unique circumstances, risk tolerance, liquidity needs and desired financial outcomes. Updating your plan every year with our latest outlooks can also help optimize your asset allocation and provide a clearer path toward achieving your financial goals with confidence.
We believe a world in transition can be empowering—once you have a process.
Why diversify your portfolio? For investing in a world in transition
The importance of guarding the value of your portfolio by using a smart diversification toolkit is one big message coming out of the recently published 28th annual edition of J.P. Morgan Asset Management’s 2024 Long-Term Capital Market Assumptions (LTCMA). The report scrutinizes more than 200 asset and strategy classes to come up with return outlooks over a 10- to 15-year horizon. The LTCMA returns expectations power the tools we use to build portfolios tailored to your goals.
In this edition, the message focuses on the breadth of opportunity available across the wider asset markets and the importance of new, robust kinds of portfolio diversification.
Why diversify? For one, the LTCMA expect greater inflation uncertainty: Prices may continue rising but there’s a risk of deflation as well. Less -reliable stock-bond dynamics may also lie ahead—instead of moving in opposite directions consistently, they may, as in 2022, decline in unison (something that hadn’t happened since 1974). These and other changes make traditional hedging more challenging.
Stocks and bonds may move in unison more frequently, requiring enhanced portfolio diversification
The chart shows varying performance of the the S&P 500 against the U.S. 10-year Treasury correlations over the course of 1980 until 2020.
We believe fixed income remains an indispensable portfolio diversifier against downside risks to growth—stocks and bonds together have historically guarded against recessionary conditions. Looking ahead, we believe high central bank interest rates support the LTCMA fixed income outlook, for real bond returns (of many types) to be robust. Critically, we believe investors can again rely on bonds both for income and diversification when growth slows suddenly.
Yet it's a good time to consider enhancing the 60/40 stock-bond balance to ensure your investments are well targeted to help you achieve your long-term goals.
Behind the need to insulate your portfolios are four profound transitions:
- The economy is in transition as persistent disinflation transitions to two-way inflation risk (inflation could be higher or lower than we’ve experienced it in the last 15 years)
- Policy is in transition as ultra-easy monetary policy transitions to more conventional monetary policy, and fiscal restraint shifts to fiscal activism and industrial policy
- Technology is in transition as the potential of artificial intelligence (AI) begins to emerge
- Climate is in transition from conventional energy to renewable energy
So how can your investments in diversified portfolios incorporate these new concerns?
Building enhanced diversification into your goals-based planning
We build goals-based plans to help ensure your portfolio is aligned to deliver against your priorities—and a diversified portfolio can play a critical role in achieving that success.
The 2024 LTCMA show that alternative investments are arguably the brightest spot in the return outlook this year. They also can help hedge against potential inflationary shocks and other possible shocks—geopolitical, for example, and potential liquidity stresses. (We note that investing in alternatives is most suitable for the longer-term buckets of your wealth, given their more illiquid nature than traditional market assets.)
Along with alternatives, the LTCMA note that portfolio resilience can potentially come through active management and thematic investing (e.g., in the energy transition), and currency hedging strategies These approaches have the additional advantage of being valuation-aware. They may generate excess returns (“alpha”) as well.
Here is what that enhanced diversification toolkit could include:
A basket of public and private diversifiers for a range of market environments
| Diversifier | When to consider | How it works |
|---|---|---|
| Adding alternative assets—especially core real assets* | Generally across market cycles; can be helpful amid high inflation, rising rates, public market stress, credit stress. | Real assets have a history of zigging when traditional assets zag (they’re negatively correlated), helping to enhance returns and hedge inflation. When inflation and rates rose in 2022, infrastructure, transport and real estate offered inflation-adjusted revenue streams and a positive real return as stocks and bonds struggled. *1 |
| Active asset management | Generally across market cycles | While generally used when seeking to improve returns, active stock-pickers and active allocators often seek to enhance portfolio diversification by moving in opposite ways to the broad equity and bond markets. |
| Select equity sectors and styles, and thematic investing | Rising economic growth, inflation. Thematic investing: Generally across market cycles | Energy and utilities sector have generally outperformed during times of high inflation. Exposure to thematic equity may capture performance from longer-term, less cyclical growth trends. |
| Currency strategy | Generally across market cycles | Using currency hedging gives investors opportunities to potentially benefit from the FX market’s low correlation with traditional markets. |
* Alternatives often involve a greater degree of risk than investing in traditional assets
*1 Sources: Bloomberg, Burgiss, Cliffwater, FactSet, HRFI, MSCI, NCREIF and J.P. Morgan Asset Management.
Bringing the enhanced portfolio to life: Aligning the research with your long-term goals
What steps should you consider discussing with your J.P. Morgan team to prepare your portfolios for a new era of investing challenges and opportunities?
Review your goals-based plan with your J.P. Morgan team. Based on the updated LTCMA and the compelling global forces calling for a renewed focus on diversification, adjustments may be needed to keep your portfolio on track.
Some things haven’t changed: the historic evidence that (despite today’s tempting high cash rates) every major asset class has performed better than cash over a 10- to 15-year investment horizon.
To hammer out a specific strategy for using the LTCMA diversification insights, there is no need to be heroic, yet there are many potential opportunities. One approach the LTCMA report suggests considering is the following:
- Starting from a balanced 60/40 (60% equities, 40% bonds) portfolio
- Diversify with alternatives
- Add a currency hedging strategy where relevant
- Add active equity and long-term thematic investments
The 2024 LTCMA outlooks underscore that fixed income remains an indispensable portfolio diversifier against growth shocks. And incorporating additional dimensions of diversification is the next level to help achieve the main overarching goal: generating wealth while minimizing value destruction. No matter how the world may transition.
Learn more about the robust diversification toolkit
Keen experience is needed to navigate a world in transition—we are here to help. Reach out to your J.P. Morgan team to learn more.
Past performance is not a reliable indicator of current and future results.
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material. Diversification does not ensure a profit or protect against loss.
JPMAM Long-Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only—they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. “Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only—they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.
This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.
