Investment Strategy

Embracing the unknown: 5 principles for your portfolio

It’s been a week 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 4% this month, 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.

Stocks and bonds have outpaced cash and inflation over time

Growth of $100 in various assets and inflation from 1991

Sources: Bloomberg Finance L.P., J.P. Morgan Asset Management - 2024 Long-term Capital Market Assumptions (LTCMAs). Global equities represented by MSCI World USD Total Return Index, U.S core fixed income by Bloomberg U.S. Investment Grade Bond Index, U.S. Treasury Bills by Bloomberg U.S. Treasury Bill 1-3 months Index, U.S. Inflation by U.S. Headline Consumer Price Index (CPI). Historical data as of April 30, 2024. LTCMA projections as of September 30, 2023.

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.

Despite swings, stocks tend to reward long-term investors

S&P 500 intra-year declines (max drawdowns) & calendar year price returns

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management - Guide to the Markets. Returns are based on price changes only and do not include dividends. Maximum drawdown refers to the largest market decline from a peak to a trough during a calendar year. Calendar return refers to calendar year returns from 1980 to present year. Data as of May 29, 2024.

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.

 

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  • Past performance is not indicative of future results. You may not invest directly in an index.
  • The prices and rates of return are indicative, as they may vary over time based on market conditions.
  • Additional risk considerations exist for all strategies.
  • The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
  • Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
  • Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise.
  • 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.
  • Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
  • The information presented is not intended to be making value judgments on the preferred outcome of any government decision.
Predicting where the market might be headed can be complex and overwhelming, but the real key to investing can be as simple as having perspective.

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The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. It is a capitalization weighted index.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). 

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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

Equal Housing Lender Icon 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.