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Investment Strategy

Building a robust investment portfolio: 3 ideas for how to diversify

As inflation decreases and the economy continues to grow, the market is proving more resilient than most forecasters had expected. Yet the picture is complicated. Consumer spending is softening, inflation is still above the Federal Reserve’s 2% target and geopolitical risks are rising.

We expect corporate profit margins to continue to support stock values this year. But diversifying is still a prudent strategy. Now is the time to consider insulating your portfolio against future potential losses, or consider taking short-term tactical positions in specific asset classes as opportunities emerge.

Achieving these goals may be possible with certain financial tools. For example, by using structured products, pre-packaged investment strategies with embedded derivatives, you can improve the diversification of your portfolio, boost your investments’ risk adjusted return potential and create strategies to guard against too steep a future market downturn.

Currently, some structured products are more attractively priced than they have been in years. Why? Because higher-for-longer interest rates have significantly improved the pricing of these products, making them an interesting—and timely—choice for many investors.

To keep your investment goals on track, consider how these financial instruments could help you enhance your portfolio. Here are the strategies worth considering now.

1: Hedge potential losses with buffers

In the current market with high equity valuations and rates, we find structured notes appealing. These are financial products that blend elements of traditional securities, like stocks and fixed income instruments, with derivatives to support specific investment goals. Typically, they can be linked to a variety of underlying assets, including stocks, bonds, commodities or currencies. Some structured notes can be tailored to reduce the impact of a market downturn on your portfolio while still allowing for potential gains.

These strategies can be particularly useful in avoiding common psychological traps identified by behavioral finance, such as hesitating too long to move out of cash after a market dip. However, as they are complex products, structured investments come with risks such as liquidity and counterparty risks, so ensure you fully understand the features – such as liquidity & credit risks—, fees and costs associated, as they may not be suitable for all investors.

To limit potential losses or rebuild an equity holding, investors often turn to structured notes that offer some downside protection against moderate moves in markets with enhanced upside returns to a certain cap, such as buffered return enhanced notes (BRENs). These are issued as debt obligations and are typically linked to the performance of a particular market index, such as the S&P 500, as the underlying asset. Notes with buffers, such as BRENS, can provide a financial—and psychological—safety net by curtailing potential losses through a level of downside portfolio buffers while still offering an opportunity to capture (and enhance) some potential gains. These types of notes are often capped, but there are other types of notes such as “market plus”notes that could offer uncapped returns.  These types of structured notes typically return the investment principal at maturity. However, keep in mind if the issuing counterparty goes under or the underlying falls below a certain level, the BREN may result in a loss of some or all principal.

Despite the credit and market risks structured notes carry, many investors like to use using structured notes to get invested or stay invested – because it provides a level of reassurance. Knowing that the likelihood of losing your entire investment is small , structured notes can help you withstand short-term market fluctuations and remain invested for the long term. These “phase-in” strategies, as they are known, operate on an investor’s behalf to reduce the risk of making an allocation decision at the wrong time.

2: Gain access to diversified income

As strong as the economic recovery has been in recent quarters, there are still plenty of risks: Consumer spending is softening and geopolitical uncertainties loom large. Diversifying your portfolio is essential—and we see different ways, now, to approach earning investment income.

Efficient income generation can be done to complement core bonds. In the event of a specific market scenario, even potential pullbacks, investors can use “cap coupon” notes as sources of diversified portfolio income. Cap coupon notes carry the moniker because they pay a coupon up to a set limit or cap. Depending on the strategy, these notes can also produce positive returns even if the underlying declines, much like long-term bonds.

Cap coupon notes can be advantageous portfolio tools in a stable or “flat” market, allowing investors to earn steady income despite market fluctuations, within a range. As mentioned, some structures may even generate positive returns when the market declines, a payout profile investors often like for uncorrelated returns. As with all structured products, cap coupon notes can lead to potential loss in investments, and come with risks such as interest rate, credit and market risk, so be sure to carefully consider these before incorporating them into your wealth plan.

We also like preferred securities, or “preferreds,” which are not structured products or derivatives, but they are part of the equity capital structure.

At first glance preferreds look like fixed income securities, but they’re actually hybrid securities that have both bond and stock characteristics. They typically offer steady income like bonds, which may help diversify your investments, and they also have the potential for price increases, like stocks.

However, not all preferreds are the same, and they do come with certain risks, including liquidity, counterparty and credit risks. Consider those issued by large financial institutions.

3: Unlock potential opportunities to capture growth

Looking ahead, we expect economic growth to remain strong, even as interest rates remain higher for longer. In this environment, you can use structured notes to complement your core investment strategies, such as an equity allocation. These financial tools allow you to participate in leveraged upside returns of a particular stock or sector based on the strength of your conviction, or position your portfolio to capture future returns without having to deploy more of your capital to buy more stock.

This can potentially enhance your portfolio.

For instance, if you have a specific market view, you can use structured notes to leverage your equity allocation. This is done by customizing your exposure using structured notes such as a return-enhanced note (REN). This type of product aims to capture and amplify positive performance of a selected market sector or asset class, potentially up to a certain cap.

As long as the underlying asset does not close below its initial price at the REN’s maturity, the note will typically pay back the principal amount—plus enhanced upside returns, since RENs include leverage. If the underlying asset closes below the initial price, some RENs offer full or partial principal protection, or some may result in a loss.  The outcome can depend on the specific terms of the REN.

So, for example, if the market is up 10% and the structured note is customized to enhance returns 1.5 times, the position could be up 15%—and possibly outperforming the market—depending on the note’s specific terms.

Right now, with markets making all time highs, it may be daunting to get invested, but structured notes that offer downside protection and compelling upside returns can be an appealing way to get invested and step out of cash.

Conclusion: Preparing for any market eventuality

Stock market volatility is inevitable, but you can prepare for it. For suitable investors, by incorporating structured products and derivatives into your portfolio strategy, you may be able to realize enhanced returns, protect your investments and access diversified sources of income. As geopolitical risks loom large this year, using structured products—particularly structured notes—could help you navigate a fragile world, take advantage of growth opportunities and most importantly, stay invested.

We can help

If you’d like to explore how your J.P. Morgan team can assist you in tailoring strategies and payout profiles to help you meet your wealth goals, please reach out. We have deep knowledge and experience in designing customized strategies for our clients.

With market risks rising, structured products may be useful tools to help enhance portfolio resilience, help generate income—and capitalize on potential equity growth opportunities.

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Important Information

Please keep in mind

The views and strategies described herein may not be suitable to all investors and more complete information is available which discusses the risks, liquidity, and other matters of interest. Please contact your J.P. Morgan team, Outlooks and past performance are not reliable indicators of future results.

J.P. Morgan Chase &Co. and its affiliates and/or subsidiaries do not practice law, and do not give tax, accounting or legal advice. We will, however, be pleased to consult with you and your legal and tax advisors as you move forward with your own planning. Additionally, please read the Important Information pages at the end of this presentation.

Key Risks:

Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss.
The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team.

Investing in Structured Notes involves a number of significant risks. We have set forth certain risk factors and other investment considerations relating to the investment below. Not all investments are suitable (or in the best interest) for all investors. You should analyze the Structured Notes based on your individual circumstances, taking into account such factors as investment objectives, tolerance for risk and liquidity needs.

  • Fixed income: Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise.
  • Equities: The price of equity securities may rise or fall due to the changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to “stock market risk,” meaning that stock prices in general may decline over short or extended periods of time.
  • Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
  • No direct claim and no investment in the underlying: Investors have no claim to the underlying index or basket of securities.
  • Use of derivatives: The purchasing of Structured Investments involve derivatives and risk factors that may not be suitable (or in the best interest) for all investors. Before investing in a Structured Investment, investors should review the accompanying prospectus and prospectus supplement to understand the actual terms and risks associated with specific structured products. In certain transactions, investors may lose their entire investment.
  • Principal at risk: Structured Products do not guarantee any return of your investment. Holders may lose 100% of their initial investment. A Structured Product may specify a level of protection at maturity, subject to the issuer’s credit risk. Notes that offer principal protection are only protected up to the specified protected amount.
  • Buy and hold to maturity instruments: Structured Notes are not designed to be short-term trading instruments, but rather investments that should be held until maturity.
  • Costs and fees: There are certain costs and fees associated with investing in Structured Notes, and you should consider these prior to investing. Details are contained in the offering material for a particular investment.
  • Risk of loss: Structured Notes do not guarantee any particular return of your investment, unless the note has principal protection, subject to the issuer’s credit risk. Structured Notes may decline in value in connection with a decline in the underlying asset value.
  • Liquidity risk: As Structured Notes are intended to be held to maturity, there may be no or only a very limited secondary market, which means you may be unable to sell before the product reaches maturity. Even if a secondary market can be found, the limited secondary market, a lack of liquidity and/or low trading volume in the market for the Structured Notes would decrease the market value of the Structured Notes. Thus, even if a secondary market exists, you may lose significant value if sold prior to maturity.
  • Issuer credit and default risk: Structured Notes are unsecured debt obligations of the issuing company, and thus subject to credit risk and default by the issuer. A decline in the creditworthiness of the issuer may affect its ability to meet its obligations, including the issuer’s ability to pay interest and repay principal. A default by an issuer could result in the loss of some or all of the amount you invest, even for Structured Notes denoted as “principal protected.” Therefore, the financial condition and creditworthiness of the issuer are important considerations.
  • ETF tracking and correlation risk: The performance and market value of an exchange-traded fund (ETF) may not correlate with the performance of the ETF’s underlying index due to factors such as, but not limited to, holding different instruments than the index, corporate actions, and transaction costs and fees. In addition, factors such as, but not limited to, market volatility and supply/demand may cause an ETF share’s market value to differ from its net asset value. These factors may materially and adversely affect the value of an ETF-linked product Volatility risk: The performance of the Structured Notes may change unpredictably. This volatility may be influenced by the market and/or external factors, including financial, political, regulatory, economic events and other conditions.
  • Derivatives/hedging risk: The issuer may at any time establish, maintain, adjust or unwind hedge positions in respect of its obligations under the product, but it is not obligated to do so. Hedging activity may adversely affect the value of assets underlying the product and the performance of the product.
  • No dividend or interest payments or voting rights, and tax consequences of investing in Structured Notes: Holders of a Structured Note do not have voting rights. There are no dividends or interest payments paid during the term of a Structured Note. You may, however, have to pay income taxes on any imputed annual income even though no payment is received until maturity. J.P. Morgan does not provide tax advice. You should review the issuer’s offering material and consult with your own tax advisor.
  • No government or other insurance protection: The Structured Notes are not bank deposits insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC), or any other governmental agency or deposit protection fund.
  • Early redemption: The Structured Notes may be redeemed before the scheduled maturity date other than as a result of being called by the issuer. Certain events that may result in an early redemption of the Structured Notes: If the Structured Notes are redeemed early following such an event, you may receive back less than your original investment. The amount payable to you on an early redemption may also factor in the issuer’s costs of terminating hedging and funding arrangements associated with the Structured Notes.
  • Currency/exchange risk: Where the Structured Notes are benchmarked to a foreign currency, changes in various factors, including rates of exchange, may have an adverse effect on the value of the investment.
  • Market disruption and economic factors: The trading market for the Structured Notes might be volatile and might be disrupted or adversely affected by many events. There can be no assurance that events in the United States or elsewhere will not cause market volatility or that such volatility will not adversely affect the price of the Structured Notes, or that economic and market conditions will not adversely affect the price of the Structured Notes, or that economic and market conditions will not have any other adverse effect. Market disruption can adversely affect the performance of the Structured Notes.
  • In addition to the level of the underlying on any day, the value of the Structured Investment will be affected by a number of economic and market factors, including the implied volatility of the underlier, the time to maturity, dividend rates, interest rates, issuer creditworthiness and macroeconomic factors, such as financial, political, regulatory or judicial events.
  • Capped returns: The return on Structured Notes may be limited by a specific maximum return, coupon or upside participation level, as defined at offering.
  • Potential conflicts: When performing duties, our and JPMorgan Chase & Co.’s economic interests and your economic interests in the Structured Notes potentially could be adverse when our family of companies plays multiple roles. It is also possible that hedging or trading activities of ours or our affiliates in connection with the Structured Notes could result in substantial returns for us or our affiliates while the value of the Structured Notes decline.
  • Liquidity: Unwinds may be provided at JPMorgan discretion. However, the proceeds of an unwind may fall short of the expected payout at maturity given the same underlying value.
  • Returns: The proceeds may depend on many variables including, but not limited to, the level and implied volatility of the underlying asset. The return may be positive, negative, or zero.
  • Holding period: The derivative position may be held to maturity or closed out prior to maturity. Held to maturity or closed out prior to maturity, the net return to investors may be positive, negative or zero.
  • Legal & tax: This material is distributed with the understanding that it is not rendering accounting, legal or tax advice. Consult your legal or tax advisor concerning such matters.
  • Performance: Past performance is no guarantee of future results. Options related disclosures: If the information contained herein regards options related strategies, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at https://www.theocc.com/about/publications/characterrisks.jsp
  • Counterparty credit: All payments are subject to J.P. Morgan counterparty credit.
  • Foreign exchange: Holders of foreign securities can be subject to foreign exchange risk, exchange rate risk and currency risk, as exchange rates fluctuate between an investment’s foreign currency and the investment holder’s domestic currency. Conversely, it is possible to benefit from favorable foreign exchange fluctuations.
  • The above is not an exhaustive list of all the risks or other investment considerations relating to the product. For a complete assessment of the risks associated with this investment, you should review, with your own professional advisors where necessary, the offering circular, term sheet and other related documentation for a particular trade, which fully describe all terms, conditions and risks. Not all investments are suitable (or in the best interest) for all investors. Investors should analyze products based on their individual circumstances and taking into account such factors as their investment objectives, tolerance for risk and liquidity needs.

Preferred investments share characteristics of both stocks and bonds. Preferred securities are typically long dated securities with call protection that fall in between debt and equity in the capital structure. Preferred securities carry various risks and considerations which include: concentration risk; interest rate risk; lower credit ratings than individual bonds; a lower claim to assets than a firm's individual bonds; higher yields due to these risk characteristics; and “callable” implications meaning the issuing company may redeem the stock at a certain price after a certain date.​

Key Risks

This material is for informational purposes only, and may inform you of certain products and services offered by private banking businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.

General Risks & Considerations

Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.

Non-Reliance

Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/ reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST

Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.

Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.

As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.

While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.

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JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

  • May contain references to dollar amounts which are not Australian dollars;
  • May contain financial information which is not prepared in accordance with Australian law or practices;
  • May not address risks associated with investment in foreign currency denominated investments; and
  • Does not address Australian tax issues.

References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan team.

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To learn more about J.P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our J.P. Morgan Securities LLC Form CRS and Guide to Investment Services and Brokerage Products

 

JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

 

Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.