How can you build a resilient long-term portfolio?

There are many risks and opportunities to think about for 2024, but investors would do well to look beyond this year and consider whether their portfolios are well-positioned to achieve their long-term goals. So what does it mean to build a resilient portfolio for the long-term?

Our proprietary analysis of portfolio data has shown that clients by-and-large still allocate too much of their assets to cash, and too little to alternatives. Why is this important? Various studies have shown that a majority of long-term portfolio returns is driven by strategic asset allocation, or SAA.

The SAA is dependent on your time horizon, risk tolerance, life circumstances and income and liquidity needs. It provides a foundation to make tactical and implementation decisions in the context of your investment strategy. So how can you think about an SAA?

With a long time horizon in mind, we can rely on J.P. Morgan’s Long-term Capital Market Assumptions, or LTCMAs, which project returns across asset classes for the next 10-15 years. They can help inform your strategic asset allocation decisions.

Despite its recent popularity with investors, cash will likely struggle to outperform in the long-term. With the reset higher in rates and still-reasonable equity valuations, a classic 60/40 portfolio allocated to equities and bonds remains attractive with an anticipated 7.0% return over the next 10-15 years.

Money market fund assets have recently reached new record highs. Investors can consider getting ahead of the rest of the market in the eventual move out of cash and into markets when rates gradually fall.

Meanwhile, alternatives remain a key source of portfolio alpha and diversification beyond traditional public markets.

A diversified allocation to alternatives to complement traditional portfolios can potentially increase returns while reducing volatility, leading to better portfolio outcomes.

Long-term investing also means making portfolios more resilient to risks and shifts in the macro and investing landscape.

A strategic allocation to alternatives plays an important role here as well, and this is where real assets such as transportation, infrastructure and real estate can provide diversification benefits.

They are especially important when the traditional diversification effect of bonds relative to equities may be less reliable in an environment of likely higher and more volatile inflation.

We can also take lessons from other sophisticated institutional investors in the market.

Compared to endowment funds, sovereign wealth funds and family offices, private clients tend to be under-allocated to alternatives, particularly private equity and real assets. Institutional investors rely on these levers to achieve long-term alpha and diversification while giving up some liquidity. Their allocation examples are worth considering as they have long-term investment horizon and return targets, balanced with shorter-term liquidity needs, similar to private clients.

Finally, investors would do well to utilize a goals-based planning approach to align their wealth with their goals. By bucketing assets into various buckets depending on their intended purpose, investors can discover whether they are are organized and utilized in a way that supports their intentions and goals.