Embracing the unknown: 5 principles for your portfolio

Last week was full of ups and downs. Recently, we’ve pored over inflation, central bank policy, U.S. elections, geopolitics, and what all of it means for our outlook and portfolio positioning. We acknowledge that those dynamics may create volatility, even as we see a strong year ahead for the economy and markets.

For most, volatility isn’t fun. Some question whether it’s time to “get out” of the market, or hold on to excess cash.

We don’t think so. For many long-term investors, it’s probably actually the time to stay (or get) invested. That might feel like a cliché, but remember: Investors are human, and humans are emotional beings. This has more value than you might think. 

Today, we share five principles to enable investors to embrace the unknown:

• Don’t try to time the market
• Know your toolkit: Each asset has a role to play
• Volatility is normal: Don’t let it derail your plans
• Maintain a long-run mindset
• Above all, have a plan with intent

1) Don’t try to time the market

The adage “sell in May and go away” makes headlines every year, based on the idea that May tends to be a weaker month for stocks than others.

Yet, this year shows why that approach can lead to missing out on crucial opportunities to grow and compound wealth over time. For all the uncertainty that May has experienced, the S&P 500 is up nearly 5% in May, the second-strongest month of 2024 so far and well above the average May return over the last 30 years. 

That makes trying to time the market a dangerous habit.

Here’s another example. Over the last two decades, an investor fully invested in the S&P 500 would have enjoyed a 10% annualized total return. Yet, if they sold at the “wrong” time and missed just the 10 best days, that return would be cut in almost half, just below 6%. Avoiding those mistakes can also be hard, given that bad days and good days tend to cluster together. Over that same timeframe, seven of the best 10 days occurred within just over two weeks of the 10 worst days.

No one has a crystal ball. So while it may feel comfortable to sit in cash, fear, greed or rash moves to “outsmart” the market can lead to emotional decisions or herd-following, rather than logical choices. 

2) Know your toolkit: Each asset has a role to play

If you’re doing some DIY this summer, you need different tools to get the job done. Your portfolio is no different. Whether it’s cash, stocks, bonds or alternative investments, each asset has a distinct role to play to achieve your long-term goals.

Cash: Everyone needs it. Many also often think of it as a safe haven, or when interest rates are high, as income. But because of inflation, cash comes with a cost. This means it’s important to think about how much you really need, and what can be invested to achieve other goals. Over the last 30 years, cash and short-term Treasury bills have barely kept pace with overall inflation, and have failed to keep up with the cost of important goods and services such as gasoline, medical care and education.

Stocks: Owning a stock means owning a stake in a company and its future. This often means benefiting from profit growth and dividends paid to reward shareholders. In the last three decades, earnings and dividends have together contributed about 95% of the S&P 500’s near 2,000% cumulative total return, with changes in valuation driving just 5%. So while stocks come with higher volatility, they can also drive capital appreciation.

Bonds: Bonds provide stable income through regular coupon payments. After the Global Financial Crisis, bonds didn’t yield much with policy rates pinned at emergency low levels. Now, the post-pandemic rate reset—while a painful adjustment—has made bonds more competitive. Tactically, short duration offers strong risk-reward potential, as central banks eventually turn to rate cuts. Strategically, long duration can serve as a ballast to economic weakness.

Alternatives: As the name suggests, alternatives can offer differentiated sources of return, dampening volatility and enhancing returns. With today’s strong economy set within the contours of a fragile world, alternatives can be important. For instance, real assets and infrastructure can hedge against inflation, private credit can earn a premium amid higher rates, and other managers can access early-stage or hard-to-access opportunities across AI, security, and the energy transition.

In all, each has a role to play, and diversification is the key to consistent returns.

3) Volatility is normal: Don’t let it derail your plans

Investors should expect pullbacks—both big ones, such as 2022’s rout (which was the worst for U.S. stocks since the Global Financial Crisis), and small ones, such as we felt during 2023’s March’s bank stress.

But despite these sell-offs, stock markets have rewarded long-term investors. Since 1980, the S&P 500 has suffered an average intra-year pullback of -14%, with 16 of those 44 years seeing even steeper losses. Yet the full-year return was positive in 33 of 44 years (75% of the time).

So again, while the “risk” for stocks is volatility, the “reward” has historically come with the return of long-term capital appreciation.

4) Maintain a long-run mindset

Over the short term, assets have a wide range of possible outcomes. Over the long term, the possibilities look much more certain, offering the chance to recoup losses and continue building your wealth. 

Consider this: If you invested in the S&P 500 for any one calendar year between 1950 and 2023, your highest total return could have been 52%, while your lowest could have been a painful 37% decline. That’s a big range—a reminder that it’s hard to predict where markets might go in any one year.

But let’s say you took a longer mindset and invested for five years. That range gets a lot less scary, with annualized stock returns between a 29% gain and a 2% decline. Or, if you added the relative stability of U.S. core bonds, building to a 60/40 allocation, that stock/bond blend did not suffer an annualized negative return over any five-year rolling period in those 70 years.¹

Keep the time horizon of your goals in mind.

5) Above all, make a plan with intent

Often, one simple question is the most important and hardest to answer: What is the purpose of your wealth? It’s important to consider...

How much cash do you need to feel comfortable? Do you have upcoming purchases or tax payments? Do you need assets that offer income and cash flow, growth to build your capital over time, or take advantage of opportunities as they arise?

The things we want to do with money—our goals—are at the root of why we invest in the first place.

In sum, we know there’s always something to worry about. Yet principles such as these can be powerful tools to avoid the pitfalls of emotionally driven, badly timed mistakes, as well as to capitalize on opportunities aligned with your goals.

Your J.P. Morgan team is here to ensure your portfolio achieves the intent of your wealth. 

¹Returns are based on calendar year returns from 1950 to 2023. Stocks represent the S&P 500. Bonds represent Strategas/Ibbotson for periods prior to 1976 and the Bloomberg Aggregate thereafter.

All market and economic data as of May 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

For illustrative purposes only. This does not reflect the performance of any specific investment scenario and does not take into account various other factors which may impact actual performance.

General/Macro Reference only

Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are generally not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment may fall as well as rise and investors may get back less than they invested.

Real Estate/Hedge Funds/Other Private Investments

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• Past performance is not indicative of future results. You may not invest directly in an index.
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Index Definitions:

The MSCI World USD Total Return Index captures large and mid-cap representation across 23 Developed Markets (DM) countries’ total returns in USD . With 1,465 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.