Could too much fixed income be a bad thing?

Did you shift some capital to short-term fixed income, to take advantage of a historical yield opportunity?

Many people did. In this period of heightened market volatility and uncertainty around the Fed's next policy move, adding to short-term fixed income holdings made sense.¹

But pan out to a long-term perspective and it has been a different story.

A portfolio that relies too heavily on fixed income can limit your ability to grow your capital over time, and could keep you from meeting your most essential goals. For example, someone who invested just in Treasury bills (maturing in less than one year) for the last 30 years would have barely preserved their purchasing power.

Fixed income is not historically a source of long-term growth—it just about allows an investor to keep up with inflation, which is still running higher than the Fed’s target.

Without enough equities, history tells us, your portfolio lacks a growth engine. Not enough growth means possibly hindering your ability to meet your long-term return objectives. That could force you to take more risk later on, or force you to lower your lifetime financial goals.

That’s why we believe if you overweighted your fixed income allocation at the expense of equities, it may be a time for a rethink. 

Equities fuel a core portfolio’s long-term growth

To grow your wealth over time, fixed income is not a substitute for equities. Your “core” portfolio— typically stocks and bonds—is designed to meet your lifelong needs (a traditional core is often a 60/40 stock-bond mix but yours may look different, based on your risk appetite and objectives). In that 60/40 portfolio, for example, two-thirds of returns historically have come from the equity portion.²

For 25 years, our annual forecasts for long-term investment returns have helped guide our investors’ core portfolios. In the 28th annual edition of our Long-Term Capital Market Assumptions (LTCMAs), published in October 2023, we projected that the long-term return forecast for U.S. Aggregate bonds remain attractive at 5.1%, and the long-term U.S. Large Cap equity return expectations remain healthy at 7.0%, despite the pressure of more challenging valuations.

How we define a core portfolio: 3 things it needs

We believe that a good core portfolio needs to include equities, your growth engine, and fixed income, your stability, so it can serve as an anchor to meet your long-term goals. Your core portfolio should be three things: reliable, rebalanced, and always fully invested. Here’s why.

1. Reliable. We believe the historical performance of 60/40 portfolios can give investors long-term confidence

It is difficult (if not impossible) to predict the direction of markets on any given day, week or month. But as you extend to multiple years or decades, historical evidence suggests market forecasts can be made with a degree of confidence. Economic cycles have come and gone but historically, economic growth has trended upward over the long-term, lifting the value of equities.

As shown in the chart below, the annualized return of a 60/40 stock-bond allocation, for example, has outperformed cash during every rolling 20-year period since 1975. The future is unknowable, of course, but this historical “beta” (market performance unaided by manager actions or “alpha”) underlies our confidence in well-constructed, diversified multi-asset core portfolios.

In the worst 20-year period for a 60/40 portfolio, when it returned 4.3% annualized, it still outperformed (the average) cash return. Eighty percent of the time, 20-year rolling annualized returns for a 60/40 were between 5.7% and 12.5%. Eighty percent of the time, returns of a 60/40 portfolio over cash were between 3.3% and 5.6%.

2. Disciplined rebalancing is important to manage “drift” in your core portfolio’s asset allocations.

In addition to adding 20 bps to average return, rebalancing is important because it potentially reduces risk, meaningfully. Rebalancing a 60/40 portfolio has minimized annual volatility by 90 basis points, on average historically.³

Consider: The equity portion of a 60/40, without rebalancing, would have grown from 60% in 1993 to 80% in 2021 because of the equities’ relatively larger appreciation. That overweighting would have made for an even more painful 2022, especially if you were expecting your risk was well balanced.³

3. Trying to time the market, rather than staying fully invested, will likely cost you.

Based on our analysis, for every year you aren’t fully invested in a traditional 60/40 core portfolio (and sit in cash instead), you’ll likely receive less in returns than if you had been fully invested.⁴ Staying invested may be uncomfortable sometimes, but we think it’s how to be best positioned to reach your long-term goals.

What makes a good core portfolio

Once your long-term core portfolio is reliable, rebalanced and fully invested, it’s meeting the job description. But most of us want to level up. So here’s a checklist for getting your core portfolio to work harder for you and potentially deliver even more: 

• Make it tax sensitive: For taxable clients, core portfolios should be managed with tax efficiency as a priority. Systematically and actively doing something called tax loss harvesting can provide a silver lining when markets are down and allow you take losses in your portfolio, potentially turning them into a tax benefit and off-setting gains made elsewhere in your investments.
• Make sure it’s cost efficient: Core portfolios should be thoughtful about preserving returns. Seeking to utilize low-cost investment vehicles for implementation, within your broader investment portfolio, can prevent underlying fees from eating away at your returns every year.
• Customize: A core portfolio is not one-size-fits-all. It can incorporate your preferences around risk tolerance, implementation, geographical regions and more (perhaps you want to include alternatives such as hedge funds, for example).
• Allow tactical adjustments, for the opportunity to earn more: Active managers can seek to add alpha (returns exceeding the market index) by finding and seizing opportunities as they arise, and tactically adjust the core portfolio accordingly.

If you’ve drifted too far toward fixed income, remember that your core portfolio is designed for long-term growth. Equities will likely play a crucial role in driving that growth. Consider adding the elements that make a core truly great (tax efficiency, cost efficiency, customization and the opportunity for alpha) and you will likely be in a better position to meet your long-term goals.

We can help

To learn more about the right core portfolio strategy for you contact your J.P. Morgan representative. 

¹ If so you weren’t alone: About $311 billion flowed into fixed income across the US asset management industry, while just $22 billion was invested in equities since October 2022. Bloomberg Finance L.P. as of 4/24/23.

² Based on yield to worst for bonds and dividend yield for equities. Bloomberg Finance L.P. as of 3/31/23 back to 12/31/1975. 60/40 = S&P 500 / US Agg portfolio rebalanced monthly. Price return for bonds calculated based on difference in total return for US Agg over 2 year period vs. the starting yield to worst.

³ Source: Bloomberg Finance L.P. Based on quarterly rebalance of 60% MSCI World / 40% Bloomberg 1-17 year muni index from 2/31/1993 – 12/31/2022.

⁴ Source: J.P. Morgan Bloomberg Finance L.P. as of 3/31/2024, based on Bloomberg Municipal 1-17 Year index and MSCI World Total Return Index from 2/31/1993 – 12/31/2022.